Cost Accounting 1

Cost accounting Limitation of financial accounting (FA) 1. historical data 2. summarized result 3. does not satisfy the information needs Accounting information is critical containing of a business organization, their dependence on accounting information has widely increased and hence is recognized as an essential resource for managing an organization FA achieves the objectives of a. identifying financial events and transaction that occurs in an organization b. measures the value of such occurrence in terms of money c. organizes the data into meaningful information d. analyses and communication of information to as broad range of persons within the organization and outside organization is enable Limitation of FA

i.

It provides only part data: FA provides out of data information to management. The management is more interested in current data than part data. It is rightly said that financial accounts provides only postmortem analysis of part activities

ii.

it reveals only over all result for the business: fa does not provide data for each and every product process department or operation separately instead it provides the financial information in a summary form for the whole organization

iii. it is stasis in nature: modern business is dynamic but financial accounts do not incorporate the changes a that takes place within the business iv.

it fails to take into account the impact of price level changes : under fa asset are shown at the actual or the historical cost consequently deprecation is also charged on the actual cost their will distort the profit. In modern inflationary condition the price level have significant impact over the financial statement

v.

it fails to exercise control over resources ie labor material and other expenses, as a result losses and wastage go uncheck under this system

vi. it does not provide basis for cost comparison , cost comparison over a period of time are between 2 jobs or 2 operations is not feasible

vii. it fails to ascertain break even point ie the sales or output where the revenue equals the cost viii. possibility of manipulation of fa the chief form of manipulation fa are in the area of valuation of inventory, provision of deprecation , creation of secretes reserves Definition of cost accounting The charted institute of management account of U.K has defined costing as the techniques and process of ascertaining cost. Weldon has defined costing as classifying recording and appropriate allocation of expenses for the determination of cost, the relation of these cost too sales value and the ascertainment of the profitability. Cost accounting and financial accounting comparison FA The

Purpose

to

CA The main purpose of CA is to

prepare P & L a/c and balance

provide detailed cost information

sheet

to management ie insider

main

aim

to

shareholder

of

FA

is

reporting and

outside

Statutory

agencies ie external user The FA are required to

requirement

prepared

to

be

Maintenance of CA are voluntary

the

expect

in

certain

requirements of companies act

where

it

has

and income tax

obligatory to keep cost recorded

Periodically

Financial reports are prepared

under the companies act Cost reporting is a continuous

reporting

periodically usually on annual

process at an interval of daily

Control aspect

basis FA emphasis on the recording of

weekly monthly instance etc CA provides detailed system of

financial transaction and does

control with the help of special

not attach important to control

techniques

aspect

costing and budgetary control

and

FA exclusively concerned with

It is concerned not only with

pre determined

historical records; the historical

historical

cost

nature of FA can be understood

predetermined cost because cost

Historical

according

to

of

cost

industries

been

like

but

made

standard

also

with

in the context of the purpose for

accounting

doesn’t

end

which it is designed

what happened in the past it extends

to

improves

performance

with

planning

and in

the

forms

of

Format

FA has a single uniform format

future CA has

presenting

of presenting information ie P &

presenting

information

L a/c balance sheet

which are tailored to meet the

various cost

information

needs of management and thus FA records only transaction with

lacks in uniform format CA records not only external

transaction

outside

transaction but also internal and

recorded

purchase receipt etc

Type

of

parties

ie

sales,

interdependent transaction like issue

of

materials

by

store

analysis of cost

FA reveals the P & L of the

keeper to production department CA shows detail cost and profit

and profit

business as a whole for a period

for each product line department

it doesn’t show the fig of cost

process etc

and

profit

products

for

the

individual

department

and

process Objectives and functions of cost accounting 1. ascertainment

of

cost

:this

is

the

primary

objective

accounting

.cost

ascertainment is achieved by different techniques and system of costing which are used under different circumstance 2. Control of cost: cost control aims at improving efficiency by controlling and reducing the cost. This objective has become increasingly important because of growing competition 3. determination of selling price: on the basis of cost information provided by cost accounting selling price of product or serviced may be fixed in period of dippers ion cost accounting guide in deciding the extent to which selling price may be reduced to meet the situation 4. Guide to business policy: it aims at serving needs of management at conducting the business with at most efficiency. Cost data provides guide lines for various

managerial decision like make or buy selling below cost, utilization of ideal capacity, introduction of new product etc.. 5. measuring and improving performance: ca measures efficiency by classifying and analysis cost data and then suggest various steps in improving performance so that profitability is increased Cost: cost is the amount of resources given up in exchange for some goods or services. Resources given up are money money’s equalient expressed in monitory unit. Institute of cost and work accounting in India (ICWAI) Defines cost as the amount of expenses (actual and national) incurred or attributed to a specified thing or activity American accounting association (AAA) Defines cost as a foregoing measured in monetary terms incurred or potentially to be incurred to achieve a specific objective Shilling law defined cost as “cost represents benefit given up to acquire goods or service Cost unit: ascertainment of cost is the central activity of the ca the ascertainment of the cost necessities the determination of unit in terms of which cost can be ascertained and expressed The unit of product or service in relation to which cost are ascertained is known as a cost unit. Cost unit varies from industry to industry and from concern to concern. A no of cost units maybe used within an organization for different purpose. Cost unit is the basis of measuring cost and making comparison between actual cost and predetermined standards The forms of ascertainment used as cost units are usually the units of physical measurement like number, weight, area, length, value, time etc.. Cost unit is a device for the purpose of breaking up or separating up into smaller sud-divisions, these smaller sub-divisions are attributed to product or services to determine. Product or service or costs of time spend for a particular job etc.

Advantages a. Revel profitable and unprofitable activities: on this information management may take step reduce or emulate wastage and ineffenciey occurring in the form of ideal time, under utilization of planned capacity spoilage of material etc. b. helps in cost control by using of techniques of std costing and budgeting control c. helps in decision making: ie provides related information for decision such as introduction of new products replacement of old machinery, make or buy etc d. Guides in fixing selling price: cost is one of the most important factor to be considered while fixing price especially at times of deprecation. The price may have to be fixed below total cost. e. Helps in inventory control: perpetual inventory is an integral part of ca and helps in preparation of entire p&l a/c. cost accounting also uses inventory control techniques like ABC analysis etc f.

Helps in cost reduction : ca helps in finding out new improved ways to reduce cost through the introduction of cost reduction programme

g. Revels idle capacity: the concerned may not be working to full capacity due to reasons sudden shortage of demand , machine breakdown or other bottle neck (experiment) in production a cost accounting system can easily work out the cost of idle capacity so that management can take immediately steps to improve the position h. Aids in formulating policies: it provides such information that enables management to formulate pricing policies preparing estimates of contracts and tenders i.

Prevent frauds and manipulation : cost audit system helps in preventing manipulation and fraud and thus gives reliable cost data to management and others

j.

Check the accuracy of financial accounts: with the help of reconciliation between financial accounting and ca at the end of the accounting period

Cost centre Cost centre is the smallest segment of activity or area or responsibility for which costs are accumulated cost centre is defined as by “CIMA” of UK as “a location person or item of equipment (or group of these) for which cost may be ascertained

and used for the purpose of control” it may be a location ie a sales area, an item of equipment ie a machinery or a delivery van, a person ie as sales man or a machine operator or a group of these The determined of a suitable cost centre is very important for ascertainment and control of cost. It enables accumulation of all such causes at one place for which a common base of recovery may be used. Types of cost centre i.

Personnel cost centre: it consist of person or a group of persons

ii. Impersonal cost centre: it consists of locator or an items of equipment or a group or a group of these iii. Operation cost centre: it consists of those persons and 1 or machine carrying out the same kind of operation iv.

Process cost centre: it is one which has a continues sequence of operation

v.

Product cost centre: it refers to a centre through which a product passed and generally corresponds to a product department. In such centre raw material are converted into finished products eg: repairs-melting shop, welding shop.

vi. Service cost centre: it is a department which incurs cost not direct on making the product these cost centre area ancillary to and render service to production cost centre eg: store department repair shop canteen Classification is the process of grouping like facts under a common destination on the basis of similarities of nature attributes or relations. Need for cost classification: arises due to use of cost data for a verity of purpose the same cost data can’t serve all purpose equally hence cost must be arranged and classified in such a way that they can be combined in different ways to serve different purpose. The following are the list of purpose the following are the list of purpose that cost classification serves 1. ascertainment of profits periodically: profit can be ascertained only when the relevant revenue is compared with the relevant cost 2. preparation of budget ; the classification helps in preparation of budget for instance when flexible budget are prepared for different levels of activity , the

fixed cost remains constant at all levels of activity were as variable cost varies according to level of output 3. cost control: fixed cost are mostly uncontrollable and if at all any control can be exercised it can be done by the top level management , variable cost on the other hand are mostly controllable when cost are classified s controllable cost and uncontrollable 4. fixed selling price: in case of classification for the purpose of fixing selling price the information needed will vary with the situation in which selling price is fixed (marginal costing) 5. Observation of overheads (indirect cost) by classifying cost into fixed and variable separate rates of absorption of overheads may be used the under observation or over absorption arising out of the overhead are different in nature and need different managerial action. 6. Other uses while planning cap. Expenditure: effect of proposed project on fixed and variable cost should be studied more over differential and comparative cost analysis are bases on classification of cost as fixed or variable Basis of classification (nature analytical classification) a. Material cost: ICMA defines material cost as “the cost of commodities other than fixed cost introduction into product or consumed in the operation of an organization. material cost may be direct or indirect material, the cost of material entering into becoming a constituent part of the product or saleable service is known as direct material cost b. labor cost : it is defined as “ the cost of remuneration for employees efforts and skills applied directly to the product or saleable service” labor consist of both direct and indirect labor cost

the above mentioned direct labor cost

inclusive of the indirect labor cost constitute the total labor cost c. expenses : expenses may relate to direct expenses or indirect expenses cost other than wages material cost , good constitute expenses On the basis of viability a. fixed cost: a cost which accurse in relation to the passage of time and which within certain output or turnover limits tense to be unaffected by flotation in volume of output or turn over the following are characteristics of the fixed cost •

total amount of fixed cost remains constant for varying levels of output

•

fixed cost per unit is indirectly proportionate to the output

•

control of fixed cost lies in the hands of top management rather than the departmental heads

b. variable cost: a cost which is aggregate tends to vary indirect proposition to changes in volume of output or turn over its characteristics are •

the variable cost per unit remains constant

•

the total variable cost varies in direct proportion to output

•

it is easy to assign variable cost 2 product or department

•

Control of variable cost lies in the hands of departmental heads eg; direct material cost direct labor cost etc..

c.

semi variable cost : a cost containing both fixed and variable elements is a semi variable cost and is partly effected by flotation in volume of output or turn over eg: tele charges, rental based on min rent supervision charges, maintenance and repair On the basis of identifiably a. direct cost: are those which may be conveniently identified with a particular cost centre or cost unit b. indirect cost: are those cost which are incurred for the benefit a no of cost centre or cost unit

eg: rent of a building ,salaries of mgt etc Indirect costs have to be apportioned on certain assumption as regards this volume. On the basis of function a. production cost: cost of fabrication assembling units of products b. administration cost: sum of cost of general mgt ,secretarial accountable and administrative services which can be directly related to production marketing research and development function of enterprise c. selling and distribution cost : the cost of seeking to create and stimulate demand and of securing orders ie cost of efforts to find and retain customers .distribution – maling the packed products available for dispatch ie facilities the movement of goods into the hands of the purchases d. finance cost; cost of external source of funds e. r&d : cost of seeking new or improved products On the basis of controllability

Cost are classified according to what they are influenced by the action of a given member of the organization a. controllable cost : are those costs which can be influenced by the action of specified members of the organization ie cost which are at least partly within the control of mgt controllable cost generally include all direct cost and ae controllable by the person responsible for the cost centre(production manager) b. uncontrollable cost : are those which cant be influenced by the action of a specified members of the organization fixed cost are uncontrollable cost On the basis of time a. Historical cost: Costs which are ascertained after been incurred ie such cost cost are

available

only

when

the

production

has

already

been

done.

Their

characteristics •

they are based on recorded facts

•

they can be verified and they are always supported by evidence of their occurrence

•

they are mostly objectives because they related to happening which have already taken place

b.

Pre determined cost: such cost are estimated cost ie computed in advance of production taking into consideration the pervious.. cost and the factors efficiently such cost pre determined cost which will result in the identification of a variance which helps the mgt in the purpose of control

On the basis of planning Budget and STD cost furnish information to mgt and helps in planning and control a.

Budget cost represent : an estimate of expenditure for different phase of business operations such as mfting, administration ,R&D etc which are co-coordinated in a foremen work for a period of time in future eg raw material cost budget, labor cost budget , cost of production budget mfting overheads budget administration overhead budget etc

b.

Standard cost: is defined as the predetermined cost based on a technical estimate for material for material, labor and overhead for a selected period of time and for prescribed set working conditions.

Cost sheet is a statement designed to show the output of a particular period along with break up of cost the data incorporated in cost sheet are collected from various statements of accounts which have been written in cost a/c on a day to day bases or regular records CIMA defines cost sheet as document which provides for assembly of the detailed cost of a cost centre or a cost unit. A cost sheet may be prepared on a weekly, quiterally, monthly or yearly bases Methods of costing Specific order costing Job order costing Contract costing Batch costing

Operation costing Single /operation/output Operating costing Process costing Multiple Departmental

Specific order costing is defined as the category of basic costing method applicable were work consist of separate contracts, job or batches each of which is authorized by a special order or contract this method is adopted in made –to-order, type of products which depends entirely on specification of customers as such there is known standardization in production process for want of uniformity Job order costing: Is defined as that form of specific order costing which applies were work is undertaken to customers requirement Work is carried out within a factor or work shop were each job moves through operations as a continuously identifiable unit Building repair carried out in customer premises also constitute job costing Costing for each job is dissimilar in nature & is identified separately by a job order no Profit or loss is ascertained for each job separately Eg ; interior deco, repair work shop , printing press etc.. Contract costing: A work usually a constructional nature and is that form of specific order costing for which customer requirements are taken and each order is off a long duration Work is performed at the premises of the contractee Most of the expenses are chargeable are direct in nature Eg: building, road, dams, bridge etc...

Batch costing: Is defined as that form of specific order costing which applies were similar articles are manufactured in batches either for sale or for use within the under taking It is similar to job costing A convenient batch of production is rated as a job Eg: bakery, hardware like bolts scores &Pharma industries Operation costing Is defined as basic costing method applicable were stdised goods or services result from a sequence or repetitive and more less continuous operation or process to which cost are charged before doing average over the units produced during the period Single output/unit costing: it is a method of costing by the unit of production where manufacturing is continues & the units are identified. In some case the units may differ I size, shape and quality. This method is called single costing as only a single type of product is manufacturing Eg; brick making industry, textile mills, paper mill, flour mills, quarries and collieries Process costing: is that form of operation costing which applies where stdized goods are produced. It is that method of costing where cost is ascertained at every stage of the process

Features: 

Out put of one process is passed as input of the subsequent process unit production is complete



The cost of every process is transferred to the subsequent process



The process industries incase normal and abnormal losses usually



In a majority of process industries by products are obtained in addition to the main the product



The cost of semi-finished goods are generally expressed in terms of fully finished goods and this process is called equivalent production

Eg : sugar industry, breweries petroleum , paints Service or operating costing: it is applicable where stdized service are provided either by an undertaking or by a service cost centre Features: 

They render uniform service to all those who depends on it



It involves heavy cap. Expenses in the mfting and supply of service



The cost of production is classified into fixed and variable as economy of operation affect the service cost unit



They make use of composite unit to express the cost per unit

Eg ; transport undertaking, service supplier supply’s of gas, electricity water, canteen hospital service library etc.. Departmental costing: under this method of costing the cost incurred in mft of particular department is ascertained The two main reasons being •

To control the cost of a dept eg :a dispensary belonging to a factory or cost of running a research department

•

To charge the cost of a dept to the finished product eg: charging the cost of maintained dept to the production dept.

Multiple costing/hybrid costing: it is used in those industries which ascertain various component parts Eg; automobiles industry, aero planes, refrigerator industry etc.