What is Cost accounting ?
What is Cost accounting?Importance too advantages Cost accounting too fiscal accounting
Introduction
Cost ascertainment, cost analysis too cost command are the
Meaning of cost accounting
Cost accounting is a branch of accounting that has evolved to overcome the limitation of financing accounting. It is the physical care for of accounting for cost, which is concerned amongst the ascertainment, allocation, distribution too accounting human face of cost. It is that branch of accounting, which deals amongst the classification, recording, allocation, stigmatization and reporting of electrical flow too perspectives costs. Actually, it is the formal machinery past times agency of which costs of products too services are ascertained too controlled.
It is an involvement reporting scheme that aims to assist the management for planning too determination making. It primarily emphasizes on cost too deals amongst collection, analysis, interpretation too presentation for managerial determination making on diverse concern problems.
Cost accounting is to a greater extent than concerned amongst short-term planning too its reporting menstruum is much lesser than financing accounting. It deals amongst historic information but it is also futuristic inwards approach. Cost accounting scheme cannot live on installed without proper fiscal accounting system. Each arrangement tin railroad train a costing scheme best scheme to its private needs. In fiscal accounting the major emphasis is inwards cost classification based on type of transaction e.g. salaries, repairs, insurance, stores etc. but inwards cost accounting, the emphasis is set on functions, activities, products too on internal planning too command too information needs of the organization.
"Cost accounting is a systematic set of procedures for recording too reporting measurements of the cost of manufacturing goods too performing services inwards the aggregate too inwards details."
- National association of accountants- USA
From the to a higher house definitions, it tin live on concluded that cost accounting is concern human relationship ting for costs aimed at providing cost data, statements too reported for the purpose to assist the management inwards planning, determination making too controlling.Objectives too functions of cost accounting
The chief objectives of cost accounting are mentioned below:
1. To ascertain cost: the chief objective of cost accounting is to ascertain the cost of goods too services. The expenses that are incurred land producing goods or rendering services are called costs. Some examples of cost are material, labor too other straight too indirect expenses. Under cost accounting, cost are collected, classified too analyzed amongst the aim of finding out the total as good as per unit of measurement cost of goods, services, process, contract etc.
2. To analyses cost too loss: another objective of cost accounting is to analyze the cost of each activity. The analysis of cost is necessary to course the cost into controllable or uncontrollable, relevant, profitable or unprofitable etc. similarly, nether cost accounting, the effects of miscues of material, idle fourth dimension breakdown or impairment of machine on the cost is also analyzed.
3. to command cost: cost command is a technique that is used to minimize the cost of production too services without comparimision on the quality. Cost accounting aims at controlling the cost past times using diverse techniques, such as measure costing too budgetary control.
4. To assist inwards fixation of selling prices: another of import objective of cost accounting is to assist inwards fixation of selling price. The costs are accumulated, classified too analyzed to ascertain cost per unit. The selling cost per unit of measurement is calculated past times adding a certainly net turn a profit on costing, output costing, service costing etc are used for determine the selling price.
5. To assist the management: cost accounting aims at assisting the management inwards planning too its implementation past times providing necessary costing information that also enable the evaluation of the past times activities as good as hereafter planning.
Importance too advantages of cost accounting
The importance too advantages of cost accounting presented below:
1. Disclosed the operating of private activity: cost accounting provides the costing information inwards term of product, department, physical care for etc. inwards other words, it provides the costing information of each activities which helps to separate the profitable too non-profitable activities.
2. Helps inwards controlling cost: cost accounting helps inwards controlling cost past times Appling approximately techniques such as measure costing too budgetary command this is done past times comparing the actual cost amongst the measure or budgeted cost. The corrective actions are taken inwards whatever departure exits.
3. Provides necessary cost information: it provides necessary cost information to the management for importations too controlling. Similarly it provides necessary costing information to the outsides such as government, taxation authority, supplier, investors etc.
4. Guides inwards fixing selling price. It ascertains the total too per unit of measurement cost of production of goods too services that helps to cook the selling cost as well. The selling cost is fixed past times adding net turn a profit amongst the total cost. It is really critical business office since the pinnacle selling cost may atomic number 82 the depression demand of the product, similarly the depression selling cost may outcome the loss.
5. Helps inwards increasing profit: it disclosed the profitable too non profitable activities that enable management to create upwards one's take away heed to eliminate or command unprofitable activities too expand or railroad train the profitable activities. This leads to the increase of profit. Similarly, it helps to innovate too implement dissimilar cost programs to increase profit.
6. Advantages to government: cost accounting is advantageous to the customers as well. The customers larn the qualification expert too services at reasonable price. This is due to the rational exercise of technology, material, labor too cost command too reduction programs.
7. Advantages to government: cost accounting helps to the authorities inwards many ways like. Determination of tax, formulation of policies regarding unusual trade, fixation of too command of price, settling minimum reward too labor disputes etc.
8. Provides reliable information for the comparing of cost: it provides reliable information too information which enable the comparing of cost betwixt period, book of output, departments too processes. Cost accounting provides standards which enable the comparing amongst actual for taking corrective actions.
9. Helps investors too fiscal institutions: it is also advantageous to investors too fiscal institutions since it discloses the profitable too fiscal seat of the concern inwards which they retrieve to invest.
10. Beneficial to workers: it is beneficial to workers as good since it emphasizes the efficient utilization of labor too scientific scheme of reward payment.
Limitation of cost accounting Besides a number of advantages, cost accounting suffers from approximately limitations. Some of than are mentioned below.
1. Lack of uniformity: cost accounting lacks a uniform procedure. It is possible that ii as competent cost accountants may larn inwards at dissimilar outcome from the same information. Keeping this limitation inwards view, all cost accounting outcome tin live on taken as mere estimates.
2. Conceptual diversity: at that topographic point are a large number of conventions, estimations too flexible factors such as classification of cost into its elements, number materials non average or measure price, apportionment of overhead expenses, arbitrary allotment of articulation costs, partitioning of overhead into fixed too variable costs, partitioning of cost into normal too abnormal too controllable too non-controllable too adoption of marginal too measure costs due to which it becomes hard to take away hold exact costs. In such a context, the reliability of cost accounting mightiness live on low.
3. Costly: there are many formalities which are to live on observed past times a small-scale too medium size concern due to which the establishment too running cost are thence much that it becomes hard for these concern to afford its cost. Thus it tin live on used alone past times large concern.
4. Ignorance of futuristic situation: the contribution of cost accounting for treatment futuristic province of affairs has non been must. For example, it has non evolved thence for tool for handing inflationary situation.
5. Lack of double entry system: under cost accounting, double entry scheme is non adopted so, cost accounting does non assist to cheque the arithmetical accuracy of the transaction too locate the errors.
6. Developing stage: cost accounting is inwards developing phase since its principles, concepts too conventions are non fully developed.
Limitations of fiscal accounting
Financial accounting suffers from a number of deficiencies which are as follows:
1. Disclose the overall outcome only: financial accounting break the overall outcome of a business. It fails to reveal the outcome of each department, process, products, jobs etc.
2. Based on historical information: financial concern human relationship ting records the past times transaction too prepares fiscal stalemates accordingly. So it is based on historical information. It is also called postmortem which does non take away hold much importance.
3. Not helpful inwards cost fixation: financial accounting does non render proper systems of controlling diverse elements of cost similar materials, labor too other expenses. Cost command physical care for tin live on adopted past times setting standards, but it lack inwards fiscal accounting.
4. Not command on cost: financial accounting does non render proper scheme of controlling diverse elements of cost similar materials, labor too other expenses. Cost command procedures tin able to prepare tender or quotations.
5. No classification of cost: financial accounting does non course into cost i.e. straight too indirect, fixed too variable, controllable, normal too abnormal etc. it alone divides expenditures into ii categories as uppercase too revenue.
6. Fails to offering a scheme of standards: financial accounting fails to mensurate the efficiency of material, labor too other resources as it does non offering whatever scheme of standard.
7. Fails to offering cost information: financial accounting does non provides cost information to the management to brand plants too decisions as good as controlling the operations.
8. Fails to ascertain cost of products almost losses: financial accounting fails to ascertain cost of products too services due to lack of cost information.
9. Fails to render information almost losses: financial accounting fails to render information caused due to idle time, idle plant, defective metafiles etc.
10. No assistance inwards planning too decision-making: financial accounting scheme does non render whatever guidance too assistance to the management inwards taking diverse decisions relating to the operations of an undertaking. It does non render the required information too assistance for the purpose of making divisions on the to a higher house mentioned matters.
Cost accounting too fiscal accounting – a comparison
Different betwixt cost accounting too fiscal accounting tin live on understood amongst the assist of the next illustration:
Financial accounting records present an overall profitability of 20% on sales land cost accounting records present a net turn a profit of 39.4% AND 41.18% ON Products X too Z respectively land at that topographic point is a loss of RS. 14000 (35%) on production Y. the cost records brand it clear that a large constituent of the net turn a profit is beingness eaten away past times production Y. if consummate details are knows to the management, it may accept necessary steps to brand the production Y a profitable one. If it is non possible, the production of production Y may live on stopped.
Methods of costing
Overall many years, diverse cost accounting method take away hold evolved to tape to tape the manufacturing costs to suit especial industries, too it is the demand for the arrangement to industrial plant life a suitable cost accounting scheme for their concern to facilitate the recording too collection of costs, allocation, apportionment too absorption into products too services, analysis too command of costs etc. but whatever the costing method inwards used, the basic costing principles relating to collection, analysis, allocation, apportionment too absorption is used. The costing methods are broadly categorized into two:
• Specific social club costing
• Continuous functioning costing
Specific social club costing
Specific social club costing methods are used past times concern organization, which involved inwards make/assemble/ create jobs or products to private customer's specific orders. This is the category of basic costing methods application where the piece of work consists of separate jobs. Batches of contracts each of which is authorized past times a specific order. The specific social club costing is farther classified into (a) task costing (b) contract costing, too (c) batch costing.
Job costing
Job costing is the method of costing, which is applied to ascertain the cost of specific jobs o work-orders which are treated as contracts of small-scale size. These jobs are to a greater extent than frequently than non not inwards similar nature too non-repetitive nature too may non live on comparable amongst each other.
This method has the next chief features:
i. Under this method, production is carried on past times a industry against customer's social club too non for ain stock.
ii. Each task or work-orders is of a separate nature.
iii. The jobs or work-order are to a greater extent than frequently than non executed inwards factories, workshops too repair shop.
iv. Under this method, task or specific work-order is the units of costing.
v. In this method, the production too its requirement are determined kickoff too thence the expenses are ascertained inwards related to it.
This method is most suitable to such activities where piece of work is done according to the customer's specifications. Examples are engineering works, plumbering works, printing press, automobile works, repair shops, electrical fittings, too decorating works etc.
Contract costing
Contract costing does non inwards regulation differ from task costing. H5N1 contract is a large task land a task is a small-scale contract. The term is commonly applied where large-scale contracts are carried out. H5N1 contact is a task of large size, which may extend fifty-fifty beyond 1 accounting period. The individual executing the contract is known as "contractor" too the individual for whom it is executed is known as "contractee".
This method has the next chief features:
i. Contacts are jobs of large sized too may maintain over to a greater extent than than 1 accounting year.
ii. Contracts are executed as per the specification given past times the contractee.
iii. Contracts are executed at contract site away from contractor's premises.
iv. Each contract is treated as a separate unit of measurement of cost for the purpose of cost ascertainment.
v. The contract is executed past times the contractor for approximately agreed amount of consideration known as 'contract price'.
The presentation of costing information relating to contracts is made inwards the shape of a separate contract concern human relationship opened for each contract undertaken past times the contractor. This method of costing is most suitable to edifice construction, civil engineering works, route too span structure etc.
Batch costing
It is a constituent of task costing too is applied to ascertain the cost of production inwards industries where production is carried on inwards batches. H5N1 batch may live on defined as a grouping of specified number of similar products. Under this method, a batch is treated as 1 task too the cost of this consummate batch is ascertained. Thus, inwards this method, the cost of a grouping of products is ascertained. The unit of measurement of cost is a batch of grouping of identical products, instead of a unmarried task social club or contact. This method of costing is mostly suitable to readymade garments, spare parts industry for motor cars, scooter, radios, watches etc., biscuit manufactures, toys making, canned products etc.
Continuous functioning costing
Where organizations, which involve inwards volume production of products, through continues operations, which volition thence live on sold from stock too volition non live on production to the specific requirements of the customers. The of import characteristic of continuous operating costing is that, the physical care for involves inwards production of identical units of output too total costs are divided past times number of units produced to give the average cost per unit. He continuous functioning scouting is classified as: (1) physical care for costing (2) functioning costing (3) unit of measurement or output costing, (4) service or operating costing too (5) multiple or composite costing.
Process costing
This method of costing is employed to ascertain the cost of production inwards industries where a production is passes through dissimilar processes or stages, each distinct too well-defined, earlier its completion. Under physical care for costing, at that topographic point is a finished production at each phase or physical care for (which becomes the raw textile of the adjacent physical care for until it reaches the finally phase of competition) too this renders it necessary to know the cost of production at each stage.
This method has the next chief features;
i. The production is maintain too is carried on for ain stock.
ii. The units manufactured too uniform too standardized.
iii. The finished product, earlier completion, has to exceed through diverse physical care for or stages, each beingness separate too good defined.
iv. The social club of the sequence of physical care for is specific too pre-determined.
v. The finished production of each physical care for becomes the raw textile of the adjacent physical care for except that of the finally physical care for which is transferred to the finished stock account.
In this method, a separate concern human relationship is opened for each physical care for too costing information presented inwards the shape of physical care for concern human relationship which is debited amongst the cost incurred thereon. This method is to a greater extent than frequently than non employed inwards industries similar nutrient products, pants making lather making, crude oil refineries, distilleries, too chemic works etc.
Operation costing
Operating costing is a farther refinement of physical care for costing. The scheme is employed inwards industries where volume or repetitive production is carried out or where articles or components take away hold to live on stocked inwards semi-finished stage, to facilitate the execution of special order, or for convenience of number or after operations. The physical care for of costing is broadly the same as for convenience of number or after operations. The physical care for costing except that cost unit of measurement is an functioning instead of a process. For example, the manufacturing of handles for bicycles involves a number of operations such as those of cutting steel sheets into proper strips, molding, machining too finally polishing. The cost of each 1 of these functioning may live on found out separately.
Units, output or unmarried costing
Where the products tin live on expressed inwards identical quantities units too where industry is continues, this type of costing is applied. Cost statements or cost sheets are prepared nether which the diverse items of expenses are classified too the total expenditure is divided past times total quantity produced inwards social club to larn inwards at per unit of measurement cost of production.
This method of costing is to a greater extent than frequently than non applied to industries where the next features are present:
i. The units of output are identical.
ii. The output or production is continuous.
iii. The units of output are natural.
iv. It is desirable to ascertain the cost per unit of measurement of output e.g., per ton, per unit, per kilogram, per meter etc.
The above-mentioned features are introduce inwards industries similar collieries, brick works, flour mills, cement mills, newspaper mills, Fe too steel mills, saccharide mills etc. which are engaged inwards producing alone 1 types of production or a few grades of the same product.
Service or operating costing
This method of costing applied to ascertain the cost of providing or operating a service. This method of costing is employed inwards those undertakings that are engaged inwards operating or providing services rather than inwards manufacturing tangible products.
These undertakings, adopting service or operating costing, to a greater extent than frequently than non take away hold the next features:
i. These undertakings are engaged inwards rendering services of unique nature to their customers.
ii. These task are required to invest a large proportion of their total uppercase inwards fixed assets e.g. buses, trucks.
iii. Motor Lorries, aircrafts, railway, etc.
The amount of working uppercase required to come across out the day-to-day expenses, is comparatively less. This method is applicable to route carry undertaking, airways, transportation companies' electricity companies, hospitals, cinemas, hotels, canteens, too H2O works etc. the presentation of costing information is made inwards the shape of a arguing knows as "operating cost sheet".
Multiple or composite costing
Multiple or composite costing is applied to ascertain the cost of complex products manufactured past times a manufacturing concern where no unmarried method of costing is applicable nether this method, the total cost is ascertained past times aggregating components cost, which are collected past times both task costing too process costing.
Multiple costing is applied to industries inwards the production of bi-cycles, motor cycles, scooter, motorcars, radios, television, typewriter, accounting machines, engines too other complex products.
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