Description
Cost Accounting is a branch of accounting. It is of recent origin, which can be traced to the beginning of 20th century. Cost Accounting has been developed due to limitations of financial accounting.
COST ACCOUNTING
Introduction:
Cost Accounting is a branch of accounting. It is of recent origin, which can be traced to the beginning of 20th century. Cost Accounting has been developed due to limitations of financial accounting. Large-scale and complex system of production in factories created new problems in accounting. The amount, number and variety of expenses increased and many new items of costs not only entered the calculations but also gained importance. By these factors, the financial accounting was exposed of its limitations. It failed to meet the ever growing needs of modern industries. Intense competition and need for survival in the industry necessitated the determination and control of costs and competitive pricing. This has led to the invention and application of new set of principles for accounting and thus emerged cost accounting as an advance phase of financial accounting. The growth of cost accounting was rapid during the First World War due to the price control and cost plus contracts by the government. The system of cost-plus contracts required the maintenance of cost records and ascertainment of cost of a job or service. The other reasons for the fast development of cost accounting in later years of First World War are growing international trade contracts, the great depression in 1929 conditions prevailing before and after the Second World War.
Cost, Cost Accounting & Cost Accountancy:
Cost:
The term ‘cost’ is defined by Shilling Law as “cost represents the resources that have been or must be sacrificed to attain a particular objective”. But for the accounting purpose, the resources sacrificed are to be measured in terms of money. Terminology of Cost Accountancy- ICWA London, explains the cost as “cost is the amount of expenditure incurred on a given thing”. Eg: cost of making steel almirah includes amount spent on quantity of steel used, electricity, wages paid to laborers, paint, welding and other overhead expenses.
Cost Accountancy:
Cost accountancy means “the application of cost accounting principles, methods and techniques to the science, art and practice of cost control and the ascertainment of profitability. It includes the presentation of information, derived there from for the purpose of managerial decision making.”
Cost Accounting:
The techniques and processes of ascertaining costs is known as costing. The technique costing consists of principles and rules which govern the procedure of ascertaining costs of a products or services. This technique is dynamic and changes with the change of time. “Costing is the classifying, recording and appropriate allocation of expenditure for the determination of the costs of products and services”. -- H.J.Wheldon. From the above definition it is clear that costing is not only a technique and process of ascertaining cost, but also method of measurement of efficiency and means of control of expenditure.
Objectives:
The objectives of costing may be classified into two categories, namely 1. Primary Objectives. 2. Subsidiary Objectives.
I.
Primary Objective:
(i) Cost ascertainment: The main objective of cost accounting is cost ascertainment. It implies a. Collection and analysis of expenses b. Measurement of production and c. Linking the production to expenses (a) Collection and analysis of expenses: There are various systems of costing like historical costs, estimated costs, standard costs for collection of expenses. (b) Measurement of production: There are various methods of costing like process costing, job costing, and output costing for measuring the quantity of production. (c) Linking of production to expenses: There are various techniques like absorption costing and marginal costing for linking the production with the expenses. (ii) Cost presentation : The second objective of costing is cost report. Appropriate cost information should be sent to right persons in right time in proper form. Different printed forms are used for efficient reporting.
(iii)
Cost control: Another important objective of costing is cost control there are various methods to ensure cost control. They are, ? Setting up of standards and budgets for expenses and production performance. ? Comparing the actual with standards to find out variations. ? Analysis the reasons for such variations. ? Taking corrective actions to eliminate variations.
II.
Subsidiary Objective:
1. 2. 3. 4. 5. To assist the management in determining the selling price. To help the management to prevent the wastage in material, men and machinery. To help the management to carry on production with utmost efficiency. To facilitate the presentation of financial and other statements very quickly. To help the management for formulating the operational policies such as, ? Determining of cost volume profit relationship ? Shutting down or operating at loss ? Making or buying from outside suppliers ? Replacing the old production methods by improved methods.
Advantages:
Primarily costing is developed to meet the necessities of management. It is an important tool in the hands of management to run the business efficiently. But there are various other agencies also who are benefited by coat accounting. The advantage of costing to various agencies can be summarized as under. 1. Advantages to management: i. Cost accounts enable the management to ascertain the true cost of each article, process or contract or any other unit of production. ii. They help in fixing price and informing the price fixation policy particularly when an industry produces several commodities. iii. They provide a reliable basis upon which tenders and estimates may be prepared. iv. They assist the management in developing cost calculations for new products and designs and to determine the profitableness or otherwise of the processed changes. v. They help management in the detection and prevention of waste, leakages and inefficiencies. vi. They enable the management to measure the efficiency and then to maintain and improve it. This is done with the help of invaluable data made available for the purpose of comparison. vii. They provide management with a means of control over-all costs including control of material.
viii. ix.
They furnish a basis for a system of budgetary control and for the introduction of standard costing. They distinguish unprofitable from profitable activities.
2. Advantages to Creditors: Cost accounts help in the creditors to study the financial positions and strength of the business concerns to which they desire to give loans. It has become a policy of many banks that no loans will be made to industrial units unless such concerns have complete cost accounting system which produce cost reports showing satisfactory trends. 3. Advantages to employees: The personnel of many business enterprises have benefited by the establishment of incentives in the form of piece rates and bonus plans which may be used to compensate all classes of workers, including supervisors, clerks, department heads and executives. Personnel directors and plant supervisors are depending more and more on the data supplied by cost accounts in their rating of employees and in their delegation of responsibilities for important tasks. 4. Advantages to the public: Cost accounts aid in reducing and controlling costs which means supplying of goods to the consumers at lower prices. 5. Advantages to the public enterprises: Cost accounts play an important role in public enterprises i.e., enterprises owned by the government. Public enterprises lack the profit motive and personal interest. So the efficiency of public enterprises can be measured and maintained only through a systematic collection of costing data and its study. Every public undertaking maintains a costing department to secure economy and efficiency in production. This serves as a guide in price fixation and to control materials, supplies etc. 6. Advantages to the Government: Cost accounting enables the assessment of income tax, excise duty etc. it facilitates the formulation of policies with regard to public finance, industry, business, commerce, foreign etc. it also helps in the preparation of five year plans for economic development. The following advantages may be mentioned as additional (a) It furnishes necessary data for the preparation of interim financial accounts. (b) It affords an independent and reliable check on the accuracy of financial accounts. (c) It provides information in order to facilitate comparisons, with estimates and also with the recorded costs at previous dates.
(d) It enables a concern to decide whether labour should be replaced by machinery to reduce the cods of production. (e) It reveals the relative efficiencies of various workers, plants and machinery. (f) It provides a check on materials, on the flow of materials in the factory and on persons.
Limitations:
Despite having many advantages, cost accounting is not free from limitations. It suffers from many disadvantages. Some of the important are discussed below. 1. Lack of uniformity: Normally, there will be no uniformity in cost ascertainment by different cost accountants from the same date. This is because different accounts follow different procedures of cost ascertainment. There is a scope for subjectivity; the cost accountants have to make some assumptions in the treatment of certain items like depreciation, valuation of stock etc., in determining the cost of a product or service. 2. Different data for different purposes: Management requires different data for different purposes in decision making process. Cost control needs data relating to standard cost and actual cost for comparison; whereas for budgeting estimated costs are required. 3. Lack of information to handle the future situations: Cost information for pricing under deflationary or inflationary conditions will be lacking. The cost information may not be the same under normal conditions and inflationary or deflationary conditions. No cost information is provided by cost accounting to handle such situations. 4. No powers to cost accountant: Cost accountant has no power to take decisions and implement them. He is a staff official, can only advise the executives on the issues but cannot force them implement his suggestions. In many cases, failure or delay in following the recommendations led to failure. 5. High cost : In cost accounting may formalities are to be observed. Such formalities increase the running costs which the small and medium size concerns cannot afford.
doc_812853842.docx
Cost Accounting is a branch of accounting. It is of recent origin, which can be traced to the beginning of 20th century. Cost Accounting has been developed due to limitations of financial accounting.
COST ACCOUNTING
Introduction:
Cost Accounting is a branch of accounting. It is of recent origin, which can be traced to the beginning of 20th century. Cost Accounting has been developed due to limitations of financial accounting. Large-scale and complex system of production in factories created new problems in accounting. The amount, number and variety of expenses increased and many new items of costs not only entered the calculations but also gained importance. By these factors, the financial accounting was exposed of its limitations. It failed to meet the ever growing needs of modern industries. Intense competition and need for survival in the industry necessitated the determination and control of costs and competitive pricing. This has led to the invention and application of new set of principles for accounting and thus emerged cost accounting as an advance phase of financial accounting. The growth of cost accounting was rapid during the First World War due to the price control and cost plus contracts by the government. The system of cost-plus contracts required the maintenance of cost records and ascertainment of cost of a job or service. The other reasons for the fast development of cost accounting in later years of First World War are growing international trade contracts, the great depression in 1929 conditions prevailing before and after the Second World War.
Cost, Cost Accounting & Cost Accountancy:
Cost:
The term ‘cost’ is defined by Shilling Law as “cost represents the resources that have been or must be sacrificed to attain a particular objective”. But for the accounting purpose, the resources sacrificed are to be measured in terms of money. Terminology of Cost Accountancy- ICWA London, explains the cost as “cost is the amount of expenditure incurred on a given thing”. Eg: cost of making steel almirah includes amount spent on quantity of steel used, electricity, wages paid to laborers, paint, welding and other overhead expenses.
Cost Accountancy:
Cost accountancy means “the application of cost accounting principles, methods and techniques to the science, art and practice of cost control and the ascertainment of profitability. It includes the presentation of information, derived there from for the purpose of managerial decision making.”
Cost Accounting:
The techniques and processes of ascertaining costs is known as costing. The technique costing consists of principles and rules which govern the procedure of ascertaining costs of a products or services. This technique is dynamic and changes with the change of time. “Costing is the classifying, recording and appropriate allocation of expenditure for the determination of the costs of products and services”. -- H.J.Wheldon. From the above definition it is clear that costing is not only a technique and process of ascertaining cost, but also method of measurement of efficiency and means of control of expenditure.
Objectives:
The objectives of costing may be classified into two categories, namely 1. Primary Objectives. 2. Subsidiary Objectives.
I.
Primary Objective:
(i) Cost ascertainment: The main objective of cost accounting is cost ascertainment. It implies a. Collection and analysis of expenses b. Measurement of production and c. Linking the production to expenses (a) Collection and analysis of expenses: There are various systems of costing like historical costs, estimated costs, standard costs for collection of expenses. (b) Measurement of production: There are various methods of costing like process costing, job costing, and output costing for measuring the quantity of production. (c) Linking of production to expenses: There are various techniques like absorption costing and marginal costing for linking the production with the expenses. (ii) Cost presentation : The second objective of costing is cost report. Appropriate cost information should be sent to right persons in right time in proper form. Different printed forms are used for efficient reporting.
(iii)
Cost control: Another important objective of costing is cost control there are various methods to ensure cost control. They are, ? Setting up of standards and budgets for expenses and production performance. ? Comparing the actual with standards to find out variations. ? Analysis the reasons for such variations. ? Taking corrective actions to eliminate variations.
II.
Subsidiary Objective:
1. 2. 3. 4. 5. To assist the management in determining the selling price. To help the management to prevent the wastage in material, men and machinery. To help the management to carry on production with utmost efficiency. To facilitate the presentation of financial and other statements very quickly. To help the management for formulating the operational policies such as, ? Determining of cost volume profit relationship ? Shutting down or operating at loss ? Making or buying from outside suppliers ? Replacing the old production methods by improved methods.
Advantages:
Primarily costing is developed to meet the necessities of management. It is an important tool in the hands of management to run the business efficiently. But there are various other agencies also who are benefited by coat accounting. The advantage of costing to various agencies can be summarized as under. 1. Advantages to management: i. Cost accounts enable the management to ascertain the true cost of each article, process or contract or any other unit of production. ii. They help in fixing price and informing the price fixation policy particularly when an industry produces several commodities. iii. They provide a reliable basis upon which tenders and estimates may be prepared. iv. They assist the management in developing cost calculations for new products and designs and to determine the profitableness or otherwise of the processed changes. v. They help management in the detection and prevention of waste, leakages and inefficiencies. vi. They enable the management to measure the efficiency and then to maintain and improve it. This is done with the help of invaluable data made available for the purpose of comparison. vii. They provide management with a means of control over-all costs including control of material.
viii. ix.
They furnish a basis for a system of budgetary control and for the introduction of standard costing. They distinguish unprofitable from profitable activities.
2. Advantages to Creditors: Cost accounts help in the creditors to study the financial positions and strength of the business concerns to which they desire to give loans. It has become a policy of many banks that no loans will be made to industrial units unless such concerns have complete cost accounting system which produce cost reports showing satisfactory trends. 3. Advantages to employees: The personnel of many business enterprises have benefited by the establishment of incentives in the form of piece rates and bonus plans which may be used to compensate all classes of workers, including supervisors, clerks, department heads and executives. Personnel directors and plant supervisors are depending more and more on the data supplied by cost accounts in their rating of employees and in their delegation of responsibilities for important tasks. 4. Advantages to the public: Cost accounts aid in reducing and controlling costs which means supplying of goods to the consumers at lower prices. 5. Advantages to the public enterprises: Cost accounts play an important role in public enterprises i.e., enterprises owned by the government. Public enterprises lack the profit motive and personal interest. So the efficiency of public enterprises can be measured and maintained only through a systematic collection of costing data and its study. Every public undertaking maintains a costing department to secure economy and efficiency in production. This serves as a guide in price fixation and to control materials, supplies etc. 6. Advantages to the Government: Cost accounting enables the assessment of income tax, excise duty etc. it facilitates the formulation of policies with regard to public finance, industry, business, commerce, foreign etc. it also helps in the preparation of five year plans for economic development. The following advantages may be mentioned as additional (a) It furnishes necessary data for the preparation of interim financial accounts. (b) It affords an independent and reliable check on the accuracy of financial accounts. (c) It provides information in order to facilitate comparisons, with estimates and also with the recorded costs at previous dates.
(d) It enables a concern to decide whether labour should be replaced by machinery to reduce the cods of production. (e) It reveals the relative efficiencies of various workers, plants and machinery. (f) It provides a check on materials, on the flow of materials in the factory and on persons.
Limitations:
Despite having many advantages, cost accounting is not free from limitations. It suffers from many disadvantages. Some of the important are discussed below. 1. Lack of uniformity: Normally, there will be no uniformity in cost ascertainment by different cost accountants from the same date. This is because different accounts follow different procedures of cost ascertainment. There is a scope for subjectivity; the cost accountants have to make some assumptions in the treatment of certain items like depreciation, valuation of stock etc., in determining the cost of a product or service. 2. Different data for different purposes: Management requires different data for different purposes in decision making process. Cost control needs data relating to standard cost and actual cost for comparison; whereas for budgeting estimated costs are required. 3. Lack of information to handle the future situations: Cost information for pricing under deflationary or inflationary conditions will be lacking. The cost information may not be the same under normal conditions and inflationary or deflationary conditions. No cost information is provided by cost accounting to handle such situations. 4. No powers to cost accountant: Cost accountant has no power to take decisions and implement them. He is a staff official, can only advise the executives on the issues but cannot force them implement his suggestions. In many cases, failure or delay in following the recommendations led to failure. 5. High cost : In cost accounting may formalities are to be observed. Such formalities increase the running costs which the small and medium size concerns cannot afford.
doc_812853842.docx