Cost Accounting
Cost Accounting
Cost Accounting
COST ACCOUNTING
INTRODUCTION
Every businessman tries to reduce the cost of manufacture to the minimum in the stage of complexity
and competition more particularly in the large-scale production. Therefore, the businessman looks for
information to study the cost of a manufacture in the past and on this basis, he assesses what it will cost
in the future. Therefore, more importance is given to profit and loss account, which is prepared on the
cost principle.
5.Uniform costing
“The use by several undertakings of the same costing principles and /or practices”
a) To the Management
1. Effective decision making
Cost accounting provides information regarding individual products, departments, divisions and cost
centers. This facilitates the management to identify unprofitable operation and improve overall
profitability.
2. Measuring efficiency
With the help of cost accounting the management can set budgets and standards for various elements of
cost and compare them with actual to measure efficiency.
3. Cost reduction
Cost accounting is helpful to management in reduction of cost through its techniques by efficient and
effective utilization of raw materials, labour and optimum production of output.
4. Fixation of selling price
Cost accounting provides information in detail regarding variable and fixed costs helps in selling price
under different circumstance.
5. Effective cost control
The fundamental objective of cost accounting is to ascertain and control costs.
6. Increasing efficiency
Under an efficient cost accounting system, proper inventory control, labour utilization and proper
analysis of expenditure is possible. This results in increasing efficiency through out the organization.
7. Effective inventory control
An effective cost accounting system and check are provided on all materials and stores.
8. Reduction of wastages of materiel and labours
Cost accounting sets predetermined costs for different elements which are compared with actual to
reveal variances. The unfavourable variances are dealt with and controlled effectively.
9. Effective utilization of resources
Managerial costing helps in decision making regarding ‘make or buy’ of components, profit planning,
sales mix etc. Standard costing and budgetary control are also helpful in effective utilization of
resources.
10. Effective budgeting
Cost accounting records both historical cost and pre-determined costs, which are essential for the
technique of budgetary.
b) To the employees
1. Sound wages policy
Cost accounting introduces incentive wages schemes, bonus plans etc, which bring better reward to
sincere and efficient workers.
2. Higher bonus plans
Cost accounting leads to an increase in productivity, lowering of cost and increasing in productivity,
workers get share in profits in the form of bonus. Higher profit naturally allows higher bonus
distribution.
3. Distinction between efficient and inefficient workers
Cost accounting provides standards for the measurement of efficiency of workers. This means
increasing in earnings, through the motion study and time study in doing jobs.
4. Security of job
Employees get better remuneration, security of job etc, due to the increasing prosperity of the industries.
c) To the creditors
Before the creditors offer the loan to a firm, they can have better understanding of the progress and
profitability of the firm through relevant reports.
d) To the government
Cost data of specific industries and general trend of cost can influence the Government to initiate
appropriate changes in granting of subsidies, formulating taxation policies, import and export legislation
etc,
e) To the public :Good costing system helps in proper utilization of resources. Cost reduction is helps
in fair price of products and profitability of organizations is helpful in prosperity of the industry through
more employment opportunities to the members of the public.
GIVE THE SHORT NOTE ON COST UNIT, COST CENTRE, PROFIT CENTRE
a) Cost unit
The selection of cost unit is important is cost accounting system. A cost unit is a unit of product, service
or time in relation to which cost may be ascertained. The unit of measurement must be clearly defined
and selected before the process of process of cost finding can be started. For example in cotton spinning
mill, cost may be calculated in terms of a meter.
b) Cost centre
A cost centre is a location, person or item of equipment for which cost may be ascertained and used for
the purpose of cost control. The cost may be a department or a machine or a plant or a salesman or a
particular work etc.
c) Profit centre
Profit center is a segment of a business that is responsible for all activities involved in the production
and sales of products and services. It is thus a segment of the organization which has been assigned
control over both revenues and costs. A profit center is created by the top management of evaluating
performance of a division.
1) Material:
“The materials cost is the cost of commodities supplied to an undertaking”.-I.C.M.A
Materials cost is of two types, vis i) Direct materials cost and indirect materials.
Direct materials cost:
Direct material is material that can be directly identified with each unit of the finished products. Cotton
used in production of cloth, leather used in the case of production of leather goods etc. any material
purchased and used for a specific job are also direct materials.
InDirect materials cost:
Materials used for the product other than the direct materials are called indirect material. In other words,
materials cost which cannot be identified with a product, job, process is known as indirect material cost.
Small tools, stationary used in works and office stationary etc.
2) Labour:
Labour is the remuneration paid for physical or mental effort expended in production and distribution.
Labour cost is also divided into direct and indirect portions.
Indirect expenses are expenses other than indirect material and indirect labour, cannot be directly
identified with units of output, job, process or operation. For example, rent, power, lighting,
depreciation, advertising etc.
4) Overheads:
Overheads are the total of all indirect expenses.
CLASSIFICATION OF OVERHEADS;
On the basis of functions overhead is classified as i) factory overhead, ii) administration or office
overheads iii) selling and distribution overhead.
Factory overheads;
This is aggregate of indirect material, indirect wages and indirect expenses incurred in the factory.
Examples of indirect factory expenses are rent, power, depreciation, lighting and heating incurred in the
factory.
CLASSIFICATION OF COST
Cost classification is the process of grouping costs according to their common characteristics. The
important classifications are:
Estimated direct labour cost taking into account any proposed increase in wage rates. Overheads are
estimated on the basis of past experience and current extends and than absorbed are estimated as
percentage for example:
1) For percentage of factory overheads to direct wages=factory overheads x100 /Direct wages
2) For percentage of office overheads to works cost=office overheads x 100 / Works cost
3) For percentage of selling overheads=selling overheads x 100 / Works cost