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8/4/2019 Cost Accounting Chpater 1
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Define the Cost, Costing, Cost accounting, Cost Accountancy
Cost
It is a measurement, in monetary terms, of the amount of resources used for th
purpose of production of goods or rendering services.
Cost is the amount of actual or notional expenditure relating to a product, jo
service, process or activity.
Cost is a resource sacrificed or foregone to achieve a specific objective
Costing
Costing includes the techniques and processes of ascertaining costs.
The Technique refers to principles which are applied for ascertaining costs
products, jobs, processes and services.
The `process refers to day to day routine of determining costs within the method
costing adopted by a business enterprise.
Cost Accounting
Cost accounting is the application of accounting and costing principle
methods and techniques in the ascertainment of costs and the analysis o
savings and/or excess as compared with previous experience or wi
standards. ( According to ICAI)
CIMA defines Cost Accounting as the establishment of budgets, standar
costs and actual costs of operations, processes, activities or products, an
the analysis of variances, profitability or the social use of funds..
It includes:
Collecting, classifying, recording, allocating and analyzing costs
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Preparation of periodical statements and reports for ascertaining an
controlling costs
Application of cost control methods
Ascertainment of profitability of activities carried out or planned.
Cost Accounting is the processing and evaluation of monetary and nonmonetary data to provide information for internal planning, control o
business operations, managerial decisions and special analysis.
Cost Accountancy is the application of costing and cost accounting principle
methods and techniques to the science, art and practice of cost control and th
ascertainment of profitability. It includes the presentation of informatio
derived there from for the purpose of managerial decision making
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Cost Concepts
Cost Object any product, machine, service or process for which cost information
accumulated. Cost objects can vary in size from an entire company, to a division o
program within the company, or down to a single product or service
Cost Unit Is a unit of product, service or time in terms of which costs ar
ascertained or expressed. It is a unit of measurement. Industry or Product cost un
basis Industry or Product cost unit basis
Automobile - Number
Cement - Tonne/ per bag etc.
Chemicals - Liter, gallon, kg, ton.
Power - Kilo watt hour
Steel - Tonne
Transport - Passenger Kilometer.
Responsibility Centers It is defined as an activity centre of a busine
organization entrusted with special task. It is the unit or function of an organizatio
under the control of a manager who has direct responsibility for its performance
Under modern budgeting & control, financial executives tend to develo
responsibility centre for the purpose of control, Responsibility centers can broad
be classified into 3 categories. They are:
(a) Cost Centers; (b) Profit centers; and (c) Investment centers;
Cost Center Is a location, person or item of equipment for which costs may b
ascertained and used for the purposes of cost control.
Types of Cost Centers:
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Nature and characteristics of cost accounting
Specialization branch of accounting
Art and science Both
Recognized as a profession
Determination of various components of total cost
Application of Statistical Data of computing Profit and Cost
Helpful to management
Scope of cost accounting
1. Cost
Classification
Recording
Allocation
Determination
Control
Comparison
Reporting
Reduction
Analysis
Audit
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Fundamental Principles of cost accounting
Cost is related to its cause
Cost is charged after it is incurred
Abnormal costs are excluded from costing
Past costs are not charged to future periods
The concept of conservatism no place in costing
Accounting for cost is based on Double entry principle.
Objectives of Cost Accounting
Cost ascertainment
Cost control
Cost reduction
Ascertainment of profitability
Determination of selling price
provide information/basis for decision making
Compliance to statutory requirements.
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Methods of Costing
(a) Specific order costing method
Job costing
Contract costing
Batch costing
Target costing(b) Continuous operation costing method
Process costing
Single/output costing
Operation costing
Operating costing
Departmental costing
Multiple costing
No. Costin
1. Job Co
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Costing Techniques
N o . C o s t i
1 . M a r g iAdvantages of Cost Accounting
Advantages to Management
Helps in ascertainment of cost
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Helps in control of cost
Helps in decision making (make or buy, retain or replace, continue or shut dow
accept or reject orders, etc)
Helps in fixing selling prices
Helps in inventory control Helps in cost reduction
Helps in measurement of efficiency
Helps in preparation of budgets
Helps in identifying unprofitable activities
Helps in identifying material losses
Helps in identifying idle time, idle capacity
Helps in improving productivity
Helps in cost comparison
Advantages to Employees
Incentive plans
Proper division of work
Less Conflicts
Advantage to creditors/ Investors / Bankers
Knowledge of earning capacity
Safety of capital
Advantage to Govt. & society.
Helpful in preparing important policies
Economic Development
Advantage to Consumer and society
Lower Prices
Improvement in quality
Improvement in standard of living
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LIMITATION OF COST ACCOUNTING
Based on estimate
Problems of different methos
Not inclusion of certain items
No applicability in trading concerns
Problems of marginal costing
High expensive
Complicated system
Essentials of a Good System
Suitability to the nature of business
Tailor made system to meet requirements of the business
Simplicity easy to understand and simple to operate Economical to install and operate
Flexibility to adapt to the changing business needs
Accuracy must provide accurate information
Promptness of information
Support of staff must have staff co-operation and participation
Cost control must ensure cost control in various fields
Detail give relevant details but avoid unnecessary detail
Clearly defined Cost Centers least ambiguity
Similarities between cost accounting and financial accounting
Record of monetary transactions
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Based on double entry system
Same basic/ Source Doucement
Determining selling price
Future policy determination
Comparative Study
Matching of expenses and revenues
Guidelines for decisions
Complementary
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