Meaning of Cost Accounting

8/8/2019 Meaning of Cost Accounting

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MEANING OF COST ACCOUNTING

C ost Accounting : Cost accounting is the classifying,recording and allocation of expenditure for the

determination of the cost of products or servicesand for the presentation of suitably arranged datafor the purpose of control and guidance ofmanagement. Cost accounting includes the

calculation of cost of every product, job section,departments, process, service.





Def inition by I.C.M.A London:-

´ The process of accounting for cost fromthe point at which expenditure is incurredor committed to the establishment of itsultimate relationship with cost centers andcost units. In its widest usage it embracesthe preparation of statistical data. Theapplication of cost control methods and theascertainment of the profitability ofactivities carried out or plannedµ.





SCOPE OF COST ACCOUNTING

1. Analyzing the profitability of product,service, job or activities.

2. Analysis of profitability of variousdepartments of segments of theorganization.

3. Analysis of the type and nature of cost.4. Explanation of the causes of variances

between actual cost and standard cost.5. Helpful in determination of selling price



Contd«6 . Analysis of the change in profit as perthe change in level of production.7. Analysis of the profit or loss of the

organization.8. Assist in management information

system.9. Provides basis for the application of

techniques of management accounting.10 .Helpful for manufacturing and service

rendering organization.



In Short Scope Includes:-

Cost Ascertainment

Cost AccountingCost Control



OBJECTIVES OF COSTACCOUNTING

1. To Asc er tain Cost : With the help of costaccounting cost per unit of a product, job or processis calculated. For calculating cost of the product orservice various methods like unit costing, Contractcosting, job costing etc. are applied. The technique

of ascertaining cost is known as costing.2. Cost cont r ol : Cost control is reducing the cost ofproduction by controlling the wastage ofmaterial,lobour and other expenses. Cost controlhelps to improve the efficiency of organization as awhole. Globalization and competition have made costcontrol area very crucial for managerial performance.

3. Cont r ol on wastag e : Cost accounting can explainthe source of wastage in the elements of cost (i.ematerial,lobour and other expenses) and thus cansave the national factors of production.



4 . De t erm ination o f se lling pr ice : Cost accounting hasth e main object to help in fixation of selling price ofthe product or service not only in normal condition butalso under various stressing market conditions.

5 . Asc er tain me nt o f pr of itability : Profitability meanscapacity to earn prof its of a departments, section,product, job or a process or service. The expectedprofits are compared with actual profits to know thereasons of difference if there is any. This helps toanalysis the efficiency of each segment of theorganization as well as for the whole of organization.

6 . Pr ovide s a bas e f or se tting busin e ss polici e s :Cost accounting helps to provide accurate costinformation. These cost data help the management intaking short term and long term policies to befollowed. For example : (a) to introduce a new product(b) replacement of old machinery with the new model.



7.Int

er firm

com

parison : Cost accounting helps inmaking comparisons of cost or profits of one firm

with other firm operating in the same industry. Forthe inter-firm comparison there should be theapplication of uniform costing system within thatindustry.

8.Mini mum capital in stocks : Cost accountingth rough various techniques like various levels ofstock, analysis of slow moving material ,Continuousstock taking can decide the objective to minimizethe investment of capital in stocks of raw material,work in progress and finished goods.

9.Int er nal audit syst em : The objective of costaccounting is to develop internal audit system whichmay help in effective working of differentdepartments of the organization.



ADVANTAGES OF COST ACCOUNTING

Advantage to ManagementAdvantage to Employees.Advantage to Society.

Advantage to the Nation



ADVANTAGES TO MANAGEMENT

1. Identification of Profitability and unprofitableActivities of the Organization .

2. Calculation of Quotation Price or Tender Price.3. Helps in Formulating Business Policies .

4. Helps the Management in decision making.

5. It Helps in making comparison.6 . Helps in Controlling Cost of Production.7. Helps in Checking Material Cost.



Costing- An Aid to Management

PlanningDecision MakingControlling



ADVANTAGES TO EMPLOYEES1. Better Wages.2. Distinction between Efficient an

Inefficient Worker.3. Higher Standards of Living.4. Social Recognition of the Workers.

5. Low Labour Turnover.6 . Elimination of strikes, lockouts anddispute.

7. More Bargaining Power of the Employees.



ADVANTAGES TO SOCIETY

Society is benefited to a large extent by theapplication of cost accounting system in thefactory through better quality products are

made available to the customer at the lowestprice. Workers of the factory are the part ofthe society and happy workers make the societymore happy. Better wages or the sharing of theprofits with the employees results in the upliftof the society as the whole. More profits makecreditors, bankers, income tax department andtrade union to believe in the financial strengthof the organization



ADVANTAGES TO NATION

Better use of the available factors ofproduction makes the nation economicallypowerful and progressive. Control on wastagegenerates more output. Satisfied worker witha higher standards of living and a happysociety are great, human resources of thenation. Low cost of production of goods and

services can help to increase exports thusearning foreign exchange for the nation. Thisforeign exchange can further be used forproviding better infrastructure to the nation





3.Th e Re sult o f Cost Syst em are not T r ustwo r thy :The argument is that as the cost depends uponpredetermined rates and standards are used with somany assumptions which may not take place in reality.Hence, cost accounting are not true and trustworthy.

4 . An accounting syst em of so many f orm s andPerf orm a's: To record the purchase, storing and issueof material, to record the arrival, departure and workingduring the day, for each job, section, division, costcenter and products, various Performa's, formsdocuments and reports are to be prepared and presentedfor cost control and cost calculation.

5 . Inapplicability o f Costing Syst em in so Many Cas e s:The argument is that the system of cost accountingcannot be applied effectively in so many types ofbusinesses and specially in small business and tradingbusiness.



F inancial A/cing Vs . Cost A/cting

Basis of Difference

PurposeF orm of Accounts

RecordingControlPeriodicity of reporting

Analysis of ProfitReporting of CostsNature of Transactions



Contd ..

InformationF ixation of Selling PriceF igures

ReferenceRelative efficiencyStock ValuationType of Science



Principles



F eatures for Ideal Costing System



Methods of Costing



F ormat



Classification



Contd«

Documents

Meaning of Cost Accounting