The term cost accounting is wider than the term cost accounting. Harmonizing to the Terminology of Management and Financial Accountancy published by the Chartered Institute of Management Accountants, London, cost accounting means, “ the application of bing and cost accounting rules, methods and techniques to the scientific discipline, art and pattern of cost control. It includes the presentation of information derived therefrom for the intent of managerial determination devising. ” Cost accounting is therefore the scientific discipline, art and pattern of cost comptroller. It is a scientific discipline because it consists of organized or systematic cognition, which a cost comptroller must possess for proper discharge of his maps. As a affair of fact the cost comptroller ‘s cognition should non stay restricted merely to such topics which cost accounting embracings but it should widen to such topics like fiscal direction, concern economic sciences, production control, operations research which will assist him in application of his cost accounting cognition to the jobs of the concern.
Cost accounting is besides the pattern of a cost comptroller because he has to do changeless attempts in the field of cost accounting. He has to endeavor invariably for cut downing costs, present cost informations in a condensed but enlightening manner to the direction so that the direction may take proper action at the opportune clip.
Definition of Cost Accounting
Cost accounting is the procedure of accounting for costs. It embraces the accounting processs associating to entering of all income and outgo and the readying of periodical statements and studies with the object of determining and commanding costs. It is therefore the formal mechanism by agencies of which costs of merchandises or services are ascertained and controlled.
Objects of Cost Accounting
Determining costs- The first and first aim of cost accounting is to happen out cost of a merchandise, procedure or service. The other aim which have been mentioned hereafter can be achieved merely when the costs have been ascertained.
Determining selling price- Business endeavors are run on a profit-making footing. It is therefore necessary that the gross should be greater than the costs incurred in bring forthing goods and services from which the gross is to be derived. Cost accounting provides information sing the cost to do and sell such merchandises or services. Of class, many other factors, such as the conditions of the market, the country of distribution, the measure which can be supplied etc. are besides to be given due consideration by the direction before make up one’s minding upon the monetary value but the cost plays a dominant function.
Cost control and cost reduction- Cost accounting aids in cost control. It uses techniques such as budgetary control, standard bing etc. for commanding costs. Budgets are prepared good in progress. The criterions for each point of cost are determined, the existent costs are compared with the criterion costs and discrepancies are found out as to their causes. This greatly increases the operating efficiency of the endeavor. Besides it, costs are required to be reduced besides. Changeless research and development activities help in decrease of costs without compromising with the quality of goods or services.
Measuring and increasing efficiency- Cost accounting involves a survey of the assorted operations used in fabricating a merchandise or supplying a service. The survey facilitates mensurating of the efficiency of the administration as a whole every bit good as of the sections besides inventing agencies of increasing the efficiency.
Determining Profits- Cost accounting besides aims at determining the net incomes of each and every activity. It produces statements at such intervals as the direction may necessitate. The fiscal statements prepared under fiscal accounting, by and large one time a twelvemonth or half-year, are spaced excessively far apart in clip to run into the demands of direction. In order to run the concern at a high degree of efficiency, it is indispensable for the direction to hold a frequent reappraisal of production, gross revenues and runing consequences. Cost accounting provides daily, hebdomadal or monthly volumes of units produced, accumulated costs together with appropriate analysis so that quantum of net income and profitableness is known.
Provides footing for managerial determination making- These policies may associate to any of the undermentioned matters-
Determination of cost-volume-profit relationship.
Closing down or runing at a loss.
Making or purchasing from outside providers etc.
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 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.
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. ”
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.
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.
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.
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.
INSTALLATION OF COSTING SYSTEM
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 Area of OperationThe Organisation 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 chwhich 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.
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.
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
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