SANDYRAWAT
SAURAV RAWAT
2.1 Definition of Cost Accounting :
Based on the terminology published by the Institute of Cost and Management Accountants of England, Cost Accounting is defined as the process of accounting for cost. This process begins with the recording of income and expenditure or the bases on which they are calculated and ends with the preparation of periodical statements and reports for the purpose of ascending and controlling costs.
2.2 Objectives of Cost Accounting :
Following are the main objectives of Cost Accounting -
(i) Ascertainment of Cost:
It can be done in two ways, namely,
(a) Post Costing, where the ascertainment of cost is done based on actual information as recorded in financial books.
(b) Continuous Costing, where the process of ascertainment is of a continuous nature i.e. where cost information is available as and when a particular activity is completed, so that the entire cost of a particular job is available the moment it is completed.
(ii) Determination of Selling Price:
Though there are various other considerations for fixing the selling price of a product (like the market conditions etc.), cost of the product is an important factor which cannot be sidelined.
(iii) Ascertainment of Profit :
The purpose of any business activity is to earn a profit and profit can be computed by matching the revenue and cost of that particular product/activity.
(iv)Cost Control and Cost Reduction:
Cost Control and Cost Reduction are two different concepts.
Cost Control aims at maintaining the costs in accordance with established standards. It involves the following steps -
a. Determination of target cost
b. Measurement of actual cost
c. Analysis of variation with respect to target cost
d. Initiation of corrective action.
Cost Reduction on the other hand aims at improvement established targets. It is defined as "the achievement of real and permanent reduction in the unit cost of goods manufactured or services rendered without impairing their suitability for the use intended or diminution in the quality of the product."
The difference between Cost Cost Control and Cost Reduction can be summarized as under:
[May'94]
Cost Control Cost Reduction
1. It represents efforts made ds towards achieving a target or a goal. 1. It represents achievement of reduction of cost .
2. The process of cost control is to Set-up a target, investigate the variations and take remedial action. 2. Cost reduction is not contended merely with the maintenance of performance with standards.
3. It assumes existence of norms or Standards which are not challenged. 3. It assumes that the standards can be improved.
4. It is preventive function. 4. It is a corrective function.
5. Sometimes, it lacks a dynamic approach. 5. It is continuous process of analysis of all the factors affecting cost.
(v) Facilitation of Inventory Valuation :
As per the Accounting Standard 2 on Valuation of Inventories, Inventories are to be valued at "lower of cost and net realisable value". Costing accounting determines the ascertainment of this "cost" based on which the inventory is valued.
(vi) Assisting Management in Decision-making :
Decision-making is a process of choosing between two or more alternatives, based on the resultant outcome of the various alternatives. A Cost Benefit Analysis also needs to be done. All this can be achieved through a good cost accounting system.
2.3 Importance of Cost Accounting :
The importance of cost accounting can be highlighted through the following benefits which accrue to any business concern:
(i) Control of Material Cost :
Normally, material cost constitutes a major portion of the cost of the product. Hence control of material cost can ensure a good amount of benefit. Control of material cost can be exercised as follows :
a. Maintaining optimum level of stock to avoid unnecessary locking up of capital
b. Maintaining an uninterrupted supply of materials
c. Use of techniques like value analysis, standardisation etc.
(ii) Control of Labour Cost :
Labour cost control can be exercised as follows:
a. Setting standard time for each activity and keeping adverse variance to the minimum
b. Laying down proper remuneration schemes
c. Control over labour turnover
d. Control over idle time, overtime
(iii) Control of Overheads :
Overheads are nothing but indirect expenses incurred at the factory, office and sales depots. Again control over overheads will ensure a control over the total cost of the product and a higher profit margin.
(iv) Determination of Selling Price :
Refer 2.2 (ii) above.
(v) Budgeting :
Any commercial activity begins with the preparation of budgets for the same. A budget serves as a guideline against which the actual performance can be measured and continuous corrective action can be taken to ensure that the budget is adhered to.
(vi) Measuring Efficiency :
Efficiency can be measured by comparing actuals against standards and corrective action can be taken.
(vii) Strategic Decision-making:
Cost accounting enables the management to take up various strategic decisions like "Make or Buy", "Shut down or Continue", "Replace or Continue", " Status quo or Expansion" etc.
2.4 Advantages of Cost Accounting :
(i) Helps optimum utilization of men, materials and machines
(ii) Identifies areas requiring corrective action
(iii) Identifies unprofitable activities, losses, inefficiencies
(iv) Helps price fixation
(v) Facilitates cost control and cost reduction
(vi) Facilitates use of various cost accounting techniques, like, variance analysis, value analysis etc.
(vii) Helps management in formulation of policies
(viii)Helps management in making strategic financial decisions. For eg: the technique of marginal costing helps the management in making various short term decisions.
(ix) Helps in formation of cost centres and responsibility centres to exercise control
(x) Marginal Cost having a linear relationship with production volume enables in formulation and solution of "Linear Programming Problems".
(xi) Provides a data-base for reference by government, wage tribunals and trade unions etc.
2.6 Limitations of Cost Accounting :
i. It is not an exact science and involves inherent element of judgement.
ii. Cost varies with purpose. Therefore cost collected for one purpose will not be suitable for another purpose.
iii. Cost accounting presents the base for taking the best decisions. It does not give an outright solution .
iv. Most of the cost accounting techniques are based on some pre-assumed notions.
v. The apportionment of common costs comes under a lot of criticism.
vi. There are different views held by different experts on the treatment of certain items of inventory management
Based on the terminology published by the Institute of Cost and Management Accountants of England, Cost Accounting is defined as the process of accounting for cost. This process begins with the recording of income and expenditure or the bases on which they are calculated and ends with the preparation of periodical statements and reports for the purpose of ascending and controlling costs.
2.2 Objectives of Cost Accounting :
Following are the main objectives of Cost Accounting -
(i) Ascertainment of Cost:
It can be done in two ways, namely,
(a) Post Costing, where the ascertainment of cost is done based on actual information as recorded in financial books.
(b) Continuous Costing, where the process of ascertainment is of a continuous nature i.e. where cost information is available as and when a particular activity is completed, so that the entire cost of a particular job is available the moment it is completed.
(ii) Determination of Selling Price:
Though there are various other considerations for fixing the selling price of a product (like the market conditions etc.), cost of the product is an important factor which cannot be sidelined.
(iii) Ascertainment of Profit :
The purpose of any business activity is to earn a profit and profit can be computed by matching the revenue and cost of that particular product/activity.
(iv)Cost Control and Cost Reduction:
Cost Control and Cost Reduction are two different concepts.
Cost Control aims at maintaining the costs in accordance with established standards. It involves the following steps -
a. Determination of target cost
b. Measurement of actual cost
c. Analysis of variation with respect to target cost
d. Initiation of corrective action.
Cost Reduction on the other hand aims at improvement established targets. It is defined as "the achievement of real and permanent reduction in the unit cost of goods manufactured or services rendered without impairing their suitability for the use intended or diminution in the quality of the product."
The difference between Cost Cost Control and Cost Reduction can be summarized as under:
[May'94]
Cost Control Cost Reduction
1. It represents efforts made ds towards achieving a target or a goal. 1. It represents achievement of reduction of cost .
2. The process of cost control is to Set-up a target, investigate the variations and take remedial action. 2. Cost reduction is not contended merely with the maintenance of performance with standards.
3. It assumes existence of norms or Standards which are not challenged. 3. It assumes that the standards can be improved.
4. It is preventive function. 4. It is a corrective function.
5. Sometimes, it lacks a dynamic approach. 5. It is continuous process of analysis of all the factors affecting cost.
(v) Facilitation of Inventory Valuation :
As per the Accounting Standard 2 on Valuation of Inventories, Inventories are to be valued at "lower of cost and net realisable value". Costing accounting determines the ascertainment of this "cost" based on which the inventory is valued.
(vi) Assisting Management in Decision-making :
Decision-making is a process of choosing between two or more alternatives, based on the resultant outcome of the various alternatives. A Cost Benefit Analysis also needs to be done. All this can be achieved through a good cost accounting system.
2.3 Importance of Cost Accounting :
The importance of cost accounting can be highlighted through the following benefits which accrue to any business concern:
(i) Control of Material Cost :
Normally, material cost constitutes a major portion of the cost of the product. Hence control of material cost can ensure a good amount of benefit. Control of material cost can be exercised as follows :
a. Maintaining optimum level of stock to avoid unnecessary locking up of capital
b. Maintaining an uninterrupted supply of materials
c. Use of techniques like value analysis, standardisation etc.
(ii) Control of Labour Cost :
Labour cost control can be exercised as follows:
a. Setting standard time for each activity and keeping adverse variance to the minimum
b. Laying down proper remuneration schemes
c. Control over labour turnover
d. Control over idle time, overtime
(iii) Control of Overheads :
Overheads are nothing but indirect expenses incurred at the factory, office and sales depots. Again control over overheads will ensure a control over the total cost of the product and a higher profit margin.
(iv) Determination of Selling Price :
Refer 2.2 (ii) above.
(v) Budgeting :
Any commercial activity begins with the preparation of budgets for the same. A budget serves as a guideline against which the actual performance can be measured and continuous corrective action can be taken to ensure that the budget is adhered to.
(vi) Measuring Efficiency :
Efficiency can be measured by comparing actuals against standards and corrective action can be taken.
(vii) Strategic Decision-making:
Cost accounting enables the management to take up various strategic decisions like "Make or Buy", "Shut down or Continue", "Replace or Continue", " Status quo or Expansion" etc.
2.4 Advantages of Cost Accounting :
(i) Helps optimum utilization of men, materials and machines
(ii) Identifies areas requiring corrective action
(iii) Identifies unprofitable activities, losses, inefficiencies
(iv) Helps price fixation
(v) Facilitates cost control and cost reduction
(vi) Facilitates use of various cost accounting techniques, like, variance analysis, value analysis etc.
(vii) Helps management in formulation of policies
(viii)Helps management in making strategic financial decisions. For eg: the technique of marginal costing helps the management in making various short term decisions.
(ix) Helps in formation of cost centres and responsibility centres to exercise control
(x) Marginal Cost having a linear relationship with production volume enables in formulation and solution of "Linear Programming Problems".
(xi) Provides a data-base for reference by government, wage tribunals and trade unions etc.
2.6 Limitations of Cost Accounting :
i. It is not an exact science and involves inherent element of judgement.
ii. Cost varies with purpose. Therefore cost collected for one purpose will not be suitable for another purpose.
iii. Cost accounting presents the base for taking the best decisions. It does not give an outright solution .
iv. Most of the cost accounting techniques are based on some pre-assumed notions.
v. The apportionment of common costs comes under a lot of criticism.
vi. There are different views held by different experts on the treatment of certain items of inventory management