Cost accounting is the application of bing and cost accounting rule, method and techniques to the scientific discipline, art and pattern of cost control and the ascertainment of profitableness. It includes the presentation of information derived at that place from for the intent of managerial determination – devising ” .
The term ‘Cost Accountancy ‘ includes Costing and Cost accounting. Its intents are Cost-control and Profitability – ascertainment. It serves as an indispensable tool of the direction for determination – devising.
“ The procedure of accounting for cost from the point at which outgo is incurred or committed to the constitution of its ultimate relationship with cost Centres and cost units. In its widest use it embraces the readying of statistical informations, the application of cost control methods and the ascertainment of the profitableness of activities carried out or planned ” Cost accounting agencies such as analysis of accounting and other information as to enable direction to cognize the cost involved in each activity together with its important constitutional elements in order to get at proper determinations. Cost accounting provides direction with cost informations associating to merchandises, procedures, occupations and different operations in order to command the costs and maximise the net incomes. It play a critical function in all the concern activities.
Definition of Cost Accounting
The application of bing and cost accounting rules, methods and techniques to the scientific discipline, art and pattern of cost control and the ascertainment of profitableness. It includes the presentation of information derived these from for the intent of managerial determination devising.
Objects of Cost Accounting
To function as a usher to monetary value repair of merchandises.
To unwrap beginnings to wastage in assorted operations of industry.
To uncover beginnings of economic system in production procedure.
To supply for an effectual system of shops and stuff.
To mensurate the grade of efficiency of the assorted sections or units of production.
To supply suited agencies and information to the top direction to command and steer the operations of the concern administration.
To exert effectual control on the costs, clip and attempts of labor, machines and other factors of production.
To compare existent costs with the criterion costs and analyze the causes of fluctuation.
To supply necessary information to develop cost criterions and to present the system of budgetary control.
It enables the direction to cognize where to conserve on costs, how to repair monetary values, how to maximise net income and so on.
Categorization of Cost
The cost-classification is the procedure of grouping costs harmonizing to their features. The cost can be classified into the followers:
Harmonizing to elements ;
Harmonizing to Functions or Operations ;
Harmonizing to Nature or Behaviour,
Accounting to Controllability,
Harmonizing to Normality,
Harmonizing to Relevance to decision-making and Control.
Harmonizing to Elementss: The cost is classified into I ) Direct Cost, and two ) Indirect Cost harmonizing to elements, viz. , Materials, Labour and Expenses, the description of which occurs in the earlier pages of this chapter.
Harmonizing to Functions: the cost is classified into the followers:
Production Cost or Manufacturing Cost,
Selling Cost, and
A brief description of each these points are given below:
Production Cost is ‘The cost of sequence of operation which begins with providing stuffs, labor and services and ends with primary wadding of the merchandise ‘ .
It is besides known as Fabrication of Factory Cost.
Administration Cost is “ The Cost of explicating the policy, directing the administration and commanding the operations of an project, which is non related straight to a production, merchandising, distribution, research or development activity or map. ” Administration Cost comprises office and Administration disbursals.
Selling Cost is “ The cost of seeking to make and excite demand ( sometimes termed ‘marketing ‘ ) and of procuring order. ”
It is besides known as Selling disbursals or Selling operating expenses which include all the disbursals of Selling Department.
Distribution Cost is “ The cost of sequence of operations which begins with doing the jammed merchandise available for despatch and ends with doing the re-conditioned returned empty bundle, if any, available for re-use ” .
It is known as Distribution disbursals or operating expenses which include disbursals like packing, warehouse disbursals, cost of cargo, transportation charges and besides the disbursals of re-conditioning the returning empty bundles for utilizing them once more.
Harmonizing to Nature or Behaviour: Cost can be classified into
Fixed Cost two ) Variable Cost, and three ) Semi-Fixed for Semi-variable Cost.
Fixed Cost is “ A cost which tends to be unaffected by fluctuations in volume of end product. Fixed costs depend chiefly on the gush of clip and make non change straight with volume of rate of end product. Fixed Costss are sometimes referred to as period costs in systems of direct costing. ” Fixed costs or Fixed disbursals are those disbursals which do non alter with the addition or lessening in the quantum of production but remain stable. They are period costs, for example, Rent of Building, Salaries etc.
Variable Cost is “ A cost which tends to change straight with volume of end product, Variable costs are sometimes referred to as direct costs in systems of direct costing. ” Variable costs or disbursals are those which increase in direct proportion with the addition in production or which lessening in direct proportion with the lessening in production, e.g. , Direct Materials, Direct Labour, Power, Fuel etc.
Semi-fixed or Semi-variable cost is “ A cost which is partially variable. ” This is a cost with alterations but non in direct proportion to the addition or lessening in the production-output, e.g. , Repairs and Maintenance, Salary of supervisors etc.
Harmonizing to controllability: The cost can be divided into:
Controllable Cost, two ) Uncontrollable Cost.
Controllable Cost: This is a cost which can be influenced by the action of a specified member of an project. The administration is divided into sections or duty Centres each managed by a Head. The costs of a peculiar section or Centre rhenium guided by the person-in-charge of the section. The costs which can be controlled by a ‘specified member ‘ who is by and large an of import nexus in the direction are the governable costs. They Head of a cost-centre or a section ahs control over variable costs merely which include Prime cost and other variable operating expenses. So the governable costs are the variable costs.
Uncontrollable Costss: it is a cost which can non be influenced by the action of a specified member of an project. Uncontrollable costs are by and large the Fixed costs, the control of which does non lie within the state of a member of the project. The alteration in fixed costs is a mater to be decided at the top degree of the direction depending upon the policy of the project. Another illustration of he unmanageable cost is where the cost of one section is shared by the other section for ground that the other section is taking the benefit of services of the section. Suppose, the cost of Power sections is shared by the Machine Department, the cost of this portion is unmanageable as it has no control over the cost of the other section, viz. , the Power Department.
Harmonizing to Normality:
The cost is classified into I ) Normal cost, and two ) Abnormal cost
Normal Cost: It is the cost at a given degree of end product in the status at which that degree of end product is usually attained.
Abnormal cost: it is a cost which is beyond normal cost.
Harmonizing to relevancy to decision-making and Control:
The costs classified on this footing are the following
Shut-down Cost: A cost which will still be required to be incurred even though a works is closed or shut-down for a impermanent period, e.g. , the cost of rent, rates, depreciation, care etc. , is known as shut-down cost.
Shun Cost: A cost which has been incurred in the yesteryear or sunk in the past and is non relevant to the peculiar decision-making is a sunk cost. If it is decided to replace the bing works ; the written down book value of the works less the sale value of the bing works, is a Sunk a Irrevocable cost.
Opportunity Cost: “ The net merchandising monetary value, rental value or reassign value which could be obtained at a point in clip if a peculiar plus or group of assets were to be sold, hired, or set to some alternate usage available to the proprietor at that clip ” is the chance cost. The cost which are related to the forfeit made or the benefits foregone are chance costs. to take an illustration, if a portion of the mill edifice has been let out on rent and now we want to utilize that part for put ining a works, we would of course lose the rent that we used to acquire. So the loss of rent is the chance which would originate due to seting the portion of that mill edifice to an alternate usage available to the proprietor, and this cost should be kept in position while put ining the works.
Imputed cost: it is conjectural cost required to be considered to do costs comparable. If the proprietor of the mill charges rent of the mill to the cost of production to do cost comparable with that of those projects which run production in rented mills, it is an Imputed cost as the rent has really non been paid. Some is the instance with bear downing Interest on one ‘s ain capital.
INSTALLATION OF COSTING SYSTEM
The demand and importance of the installing and the administration of a good system of cost accounting are being progressively realized soon all over the concern versatility. The common experience of enthusiastic young persons mounting the concern – tree and falling mid-way without even roll uping the foliages owes to the ignorance of he utilize installing and administration of addressing system, and to the infatuation that the net incomes could be earned without it. A good system is the key-point
overning, the mechanism of an endeavor in the field of cost control, ascertainment of profitableness, and managerial decision-making.
Installation of a cost system is non an disbursal but an investing as the wagess are much greater than the disbursals incurred. The cost system is for the concern and non the concern for a system of cost. Therefore, the system has to be so designed as to run into the specific demands of the endeavor.
General Consideration for put ining Costing System
The general considerations to be observed in put ining a costing system are as follows:
The Aim: Whether the aim of put ining the costing system is limited to a specific country, e.g. material direction, or repairing selling monetary value. Or to get at a certain managerial determination ; or the object is to put in the system for covering all the facets of cost impacting the concern. The attack to put in the system will be dependent on its aims.
The Area of Operation: Having decided the aim, the countries of operation of the system are to be studied, by which the direction can be best benefited. If production is slack, attending will hold to be paid to increase it ; if production is good but the gross revenues are withdrawing, survey will be made to increase the gross revenues and action taken harmonizing to the consequences of survey and analysis. Such countries which require immediate attending are to be carved out on precedence footing to be handled by the cost system,
The Administration of the Business: No system of cost installing would win until the administration construction of the concern is taken into history. The organisational portion would assist to find the range of working and betterment. If the involvements of direction call for certain minor alterations in the organisational construction, to its advantage, the same may hold to be done.
The Conception & A ; Reception of the Idea: The thought of the installing of the cost system is to be placed before the staff and the workers in a mode that it is good received and non objected to on flimsy evidences. The success of the system would depend on the cooperation of he persons engaged in the endeavor, and the cooperation will be away coming merely if the thought and programs are good conceived and received. The benefits of presenting the system to all the subdivisions should be good explained.
Collection of Data & A ; Prompt Information: The cost informations plants as a base for decision-making. There should be evolved a proper system for the aggregation of the needed cost informations and information quickly. Second, there should be a system to verify the rightness of the informations supplied, otherwise the decisions drawn would be incorrect and clip spent in its working would travel waste.
Cost Records & A ; Cost Books: The care of cost records and cost books depends on the size and nature of the concern, but the basic demands. The mode in which the fiscal histories could be interlocked into an built-in accounting system has to be studied and worked out. Decision has to be taken if two separate set of books-one for fiscal histories and other for cost accounts-have to be maintained and thenceforth the consequences are to be reconciled. Proper books and records are to be kept and maintained to run into the demands of either of the two state of affairss mentioned above.
Control system for the Elementss of Cost: System would hold to be devised for entering and commanding costs of stuffs, labor and operating expenses, in conformity with bing rules and processs.
Type and Method of Costing: The pick of method of bing would depend on the nature of production, e.g. , Job Cost method or the Procedure Cost method. For cost control, standard bing along with budgetary control may hold to be selected and applied. Similarly, for determination devising, Marginal and Differential bing techniques may be found utile. Preparations for the application of the peculiar method and technique/type should be made ab initio.
Duty Accounting: Responsibility accounting is a technique of cost control by deputing, etc. , known as duty Centres. Its has to be judged whether a peculiar functionary who had been assigned a peculiar map, has implemented the same or non within the clip ‘ allotted to him, or non, and therefore the duty has got to be fixed for failure-action on single individuals, for the interest of control of cost. For this intent, a system of duty accounting should be evolved.
Specific considerations for put ining costing system
The specific considerations as distinct from general considerations to be kept in position while put ining a cost system are as follows:
Size and Nature of Business: In a concern of large size, a elaborate cost system is necessary while in a little concern, the system should be within the demands so that the disbursals on the installing and its working may non out-weigh the public-service corporation.
The cost system is good for concern engaged in fabrication or in service-rendering concerns but for others. Even in production endeavor like pit where the production costs are all direct costs, the fiscal where the production costs are all direct costs, the fiscal histories may be so designed as to rid of the demand of any cost system, unless otherwise called for.
Merchandises: the nature of merchandise determines the method of bing to be applied. If the stuff content of the merchandise is more valuable, the stuff cost records need be kept in relatively more luxuriant mode so as to do material cost control effectual. Lapp is the place with respect to labor and overhead.
Administration: The organizational set up for a costing system should be modelled that the control portion is exercised by the Cost Accountant, as such ; the present organizational set up of the costing section need near analyze to propose necessary alterations.
Functional survey: The functional divisions of an project based on cost are a ) Fabrication, B ) Administration, and degree Celsiuss ) Selling & A ; Distribution. A survey of the present working of the different sections in necessary to propose betterments.
Principles for Smooth Working
The undermentioned rules should be kept in head while presenting the cost system:
The system should be simple and easy to run.
The system should be flexible, so that it may be expanded or contracted per demands of the concern.
The bing form should be disturbed merely every bit small as may be considered desirable.
The desired alterations be introduced bit by bit and non in hastiness.
Assurance be created by the Cost comptroller in the heads of direction and
Executives sing the public-service corporation of the system, so as to avoid unneeded unfavorable judgment
And to rid of obstructions.
Line of Action
The undermentioned line of action is recommended for the installing of cost system.
Determination of the type of costing and the method of bing, as may be suited for the project.
To fix signifiers, card, report-performs books etc. , for maintaining records of all the elements of cost, viz. , stuff, labor and operating expenses.
To make up one’s mind issues sing stuff cost control, i.e. , purchase, hive awaying, issue and rating.
To make up one’s mind affairs sing labour cost control, i.e. , occupation rating, virtue evaluation, assignment, clip recording, division of work, wage of labor and other allied jobs like idle clip, overtime, labour turnover, insouciant workings, etc.
Where the work is carried on more by machines, proper records be kept for the machines.
To propose a suited system for the aggregation, categorization and analysis of all.
Types of operating expenses, i.e. , fabrication, administrative, and selling & A ; distributive.
To make up one’s mind the methods of allotment and allotment of operating expenses among the production sections and Service sections which should be earlier clearly demarcated, and to make up one’s mind the method of soaking up of operating expenses.
To make up one’s mind normal capacity of production and prepare budgets and criterions.
To keep books of cost control based on double-entry rule.
To invent information system by which the costing section may pass on to other sections and receive studies and other necessary information ‘s quickly.
I express my sincere gratitude and thanks to MS.POOJA KALRA for his valuable and odd counsel and sincere attempts in seeking to do us non merely familiar but good equipped with the basicss and edifice rocks of the research work. The attempts put up by us during the development of this undertaking would non hold been fruitful, if it were non the people around us, who encouraged us at all times. Taking this chance, farther we would wish to thank the staff and the module members of the establishment for being at that place whenever we need their aid.
We are besides thankful to Prof. Col. Mahander Singh Director General, RDIAS for his adept counsel and cooperation in doing our undertaking acquisition and worthwhile experience.