Cost Accounting Chpater 1

8/4/2019 Cost Accounting Chpater 1

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Define the Cost, Costing, Cost accounting, Cost Accountancy

Cost

It is a measurement, in monetary terms, of the amount of resources used for th

purpose of production of goods or rendering services.

Cost is the amount of actual or notional expenditure relating to a product, jo

service, process or activity.

Cost is a resource sacrificed or foregone to achieve a specific objective

Costing

Costing includes the techniques and processes of ascertaining costs.

The Technique refers to principles which are applied for ascertaining costs

products, jobs, processes and services.

The `process refers to day to day routine of determining costs within the method

costing adopted by a business enterprise.

Cost Accounting

Cost accounting is the application of accounting and costing principle

methods and techniques in the ascertainment of costs and the analysis o

savings and/or excess as compared with previous experience or wi

standards. ( According to ICAI)

CIMA defines Cost Accounting as the establishment of budgets, standar

costs and actual costs of operations, processes, activities or products, an

the analysis of variances, profitability or the social use of funds..

It includes:

Collecting, classifying, recording, allocating and analyzing costs


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Preparation of periodical statements and reports for ascertaining an

controlling costs

Application of cost control methods

Ascertainment of profitability of activities carried out or planned.

Cost Accounting is the processing and evaluation of monetary and nonmonetary data to provide information for internal planning, control o

business operations, managerial decisions and special analysis.

Cost Accountancy is the application of costing and cost accounting principle

methods and techniques to the science, art and practice of cost control and th

ascertainment of profitability. It includes the presentation of informatio

derived there from for the purpose of managerial decision making


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Cost Concepts

Cost Object any product, machine, service or process for which cost information

accumulated. Cost objects can vary in size from an entire company, to a division o

program within the company, or down to a single product or service

Cost Unit Is a unit of product, service or time in terms of which costs ar

ascertained or expressed. It is a unit of measurement. Industry or Product cost un

basis Industry or Product cost unit basis

Automobile - Number

Cement - Tonne/ per bag etc.

Chemicals - Liter, gallon, kg, ton.

Power - Kilo watt hour

Steel - Tonne

Transport - Passenger Kilometer.

Responsibility Centers It is defined as an activity centre of a busine

organization entrusted with special task. It is the unit or function of an organizatio

under the control of a manager who has direct responsibility for its performance

Under modern budgeting & control, financial executives tend to develo

responsibility centre for the purpose of control, Responsibility centers can broad

be classified into 3 categories. They are:

(a) Cost Centers; (b) Profit centers; and (c) Investment centers;

Cost Center Is a location, person or item of equipment for which costs may b

ascertained and used for the purposes of cost control.

Types of Cost Centers:


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Nature and characteristics of cost accounting

Specialization branch of accounting

Art and science Both

Recognized as a profession

Determination of various components of total cost

Application of Statistical Data of computing Profit and Cost

Helpful to management

Scope of cost accounting

1. Cost

Classification

Recording

Allocation

Determination

Control

Comparison

Reporting

Reduction

Analysis

Audit


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Fundamental Principles of cost accounting

Cost is related to its cause

Cost is charged after it is incurred

Abnormal costs are excluded from costing

Past costs are not charged to future periods

The concept of conservatism no place in costing

Accounting for cost is based on Double entry principle.

Objectives of Cost Accounting

Cost ascertainment

Cost control

Cost reduction

Ascertainment of profitability

Determination of selling price

provide information/basis for decision making

Compliance to statutory requirements.


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Methods of Costing

(a) Specific order costing method

Job costing

Contract costing

Batch costing

Target costing(b) Continuous operation costing method

Process costing

Single/output costing

Operation costing

Operating costing

Departmental costing

Multiple costing

No. Costin

1. Job Co


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Costing Techniques

N o . C o s t i

1 . M a r g iAdvantages of Cost Accounting

Advantages to Management

Helps in ascertainment of cost


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Helps in control of cost

Helps in decision making (make or buy, retain or replace, continue or shut dow

accept or reject orders, etc)

Helps in fixing selling prices

Helps in inventory control Helps in cost reduction

Helps in measurement of efficiency

Helps in preparation of budgets

Helps in identifying unprofitable activities

Helps in identifying material losses

Helps in identifying idle time, idle capacity

Helps in improving productivity

Helps in cost comparison

Advantages to Employees

Incentive plans

Proper division of work

Less Conflicts

Advantage to creditors/ Investors / Bankers

Knowledge of earning capacity

Safety of capital

Advantage to Govt. & society.

Helpful in preparing important policies

Economic Development

Advantage to Consumer and society

Lower Prices

Improvement in quality

Improvement in standard of living


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LIMITATION OF COST ACCOUNTING

Based on estimate

Problems of different methos

Not inclusion of certain items

No applicability in trading concerns

Problems of marginal costing

High expensive

Complicated system

Essentials of a Good System

Suitability to the nature of business

Tailor made system to meet requirements of the business

Simplicity easy to understand and simple to operate Economical to install and operate

Flexibility to adapt to the changing business needs

Accuracy must provide accurate information

Promptness of information

Support of staff must have staff co-operation and participation

Cost control must ensure cost control in various fields

Detail give relevant details but avoid unnecessary detail

Clearly defined Cost Centers least ambiguity

Similarities between cost accounting and financial accounting

Record of monetary transactions


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Based on double entry system

Same basic/ Source Doucement

Determining selling price

Future policy determination

Comparative Study

Matching of expenses and revenues

Guidelines for decisions

Complementary


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Documents

Cost Accounting Chpater 1