UNIT-I INTRODUCTION
OVERVIEW ORIGIN AND GROWTH
MEANING
OBJECTIVES
ADVANTAGES
DIFFERENCE BETWEEN FINANCIAL, COST AND MANAGEMENT ACCOUNTING
COST CONCEPTS AND CLASSIFICATIONS
ROLE OF A COST ACCOUNTANT IN AN ORGANIZATION
COST SHEET
ORIGIN AND GROWTH
Beginning of the 20th Century and the First World War (1914-1918) made industrialists more cost conscious.
Reasons- Growing competition between manufacturers and increasing government control over pricing.
World war I: manufacturing was done on “cost plus” system
World war II: government placed a blanket control over prices
Need was felt to-
Improve quality of products
Trace costs accurately of each job or product
Control costs
Financial accounting failed in achieving the above stated objectives which made accountants to think of a new technique of accounting known as cost accounting.
MEANING Cost accounting is the process of collecting
information about the costs incurred by a
company’s activities, assigning selected costs to
products and services and other cost objects, and
evaluating the efficiency of cost usage.
Cost accounting is mostly concerned with
developing an understanding of where a
company earns and loses money, and providing
input into decisions to generate profits in the
future.
MEANING
objectives Ascertainment of cost
Primary objective
Different techniques and systems of costing are used in
different industries for cost ascertainment
Control and reduction of cost
Improved efficiency
Growing competition has increased the importance of this
objective
Guide to business policy
Serves the need of management in conducting
business with utmost efficiency
Determination of selling price
Provides relevant information to fix selling prices
of products and services
Measuring and improving performance
Measures efficiency by classifying and analysing cost
data
Suggest steps to improve performance and thus the
profitability
Advantages to Management
Reveals profitable and unprofitable activities
Management can use this information to reduce or
eliminate wastages and inefficiencies like idle time,
spoilage, under-utilisation of plant capacity, etc.
Helps in cost control
Through special techniques like standard costing and
budgetary control
Helps in decision making
Supplies suitable cost data and other related information
for decisions like make or buy, determining export prices,
introduction of a new product line, etc.
Advantages to Management
Guides in fixing selling prices
Guides management in fixation of selling prices
particularly during depression
Helps in inventory control
Through techniques like perpetual inventory system,
ABC Analysis, level setting , etc.
Aids in formulating policies
Provides information to management to formulate
production and pricing policies and preparing estimates of
contracts and tenders.
Advantages to Management Helps in cost reduction
Helps in introduction of a cost reduction programme and finding out new and improved ways to reduce costs
Reveals idle capacity
Helps in working out the cost of idle capacity
Checks the accuracy of financial accounts
Reconciles cost and financial accounting at the end of the accounting year
Prevents fraud and manipulation
Cost Audit System helps in preventing manipulation and frauds
Advantages to Workers
Introduction of incentive plans of wage payment
Higher productivity and higher earnings for workers
Advantages to Society
Lower prices of products and services due to cost
reduction and cost control
Advantages to Government Agencies and Others
Ready figures to help resolving issues of price fixation,
wage level fixation, settlement of industrial disputes, etc.
DIFFERENCE BETWEEN FINANCIAL AND COST ACCOUNTING
FINANCIAL
ACCOUNTING
COST ACCOUNTING
OBJECTIVE It provides information about financial performance and financial position of the business
It provides information of ascertainments of costs to control and for decision making about the costs.
NATURE It classifies records, presents and interprets transactions in terms of money.
It classifies, records, presents and interprets in a significant manner materials, labour and overhead costs.
RECORDING OF DATA
It records historical data. It records and presents estimated, budgeted data. It makes use of both historical costs and predetermined costs.
DIFFERENCE BETWEEN FINANCIAL AND COST ACCOUNTING
FINANCIAL
ACCOUNTING
COST ACCOUNTING
USERS OF INFORMATION
External users like shareholders, creditors, financial analysts, government and its agencies, etc.
Used by Internal management at different levels.
ANALYSIS OF COSTS AND PROFITS
It shows profit/loss of the organization.
It provides details of costs and profit of each product, process, job. etc.
TIME PERIOD They are prepared for a definite period, usually a year.
They are prepared as and when required.
PRESENTATION OF INFORMATION
A set format is used for presenting financial information.
There are no set formats for presenting coast information.
COST CONCEPTS Cost, Expense and Loss
Cost is “the amount of expenditure (actual or notional)
incurred or attributable to a given thing”. (CIMA, UK)
Expense is defined as “an expired cost resulting from a
productive usage of an asset”.
Loss is defined as “reduction in firm’s equity, other than from
withdrawals of capital for which no compensating value has
been received”.
Cost object
Cost object may be defined as “ anything for which a separate
measurement of cost may be desired”.
Example- Product for car, TV, Activity for Developing a
website on the internet, purchasing raw material, etc.
COST CONCEPTS
Cost Centre
A cost centre is defined by CIMA of UK as “a location, person, or
item of equipment (or group of these) for which costs may be
ascertained and used for the purpose of control”.
It refers to a section of the business to which costs can be charged.
It may be a location (department, sales area), an item of equipment
(machine, delivery van), a person (salesman, machine operator) or a
group of these.
Cost Unit
A cost unit is defined by CIMA as a “unit of product, service or time
in relation to which cost may be ascertained or expressed”
Examples- Ton for cement, kilowatt hour for electricity, etc.
CLASSIFICATION OF COSTS DIRECT AND INDIRECT COSTS
Direct costs
Costs which are incurred for and conveniently identified with a
particular cost unit, process or department.
Example, cost of steel used in manufacturing a machine
Indirect costs
General costs incurred for the benefit of a number of cost units,
processes or departments.
Cannot be conveniently identified with a particular cost unit or
cost centre.
Example, depreciation of machinery, insurance, lighting, power,
rent, etc.
CLASSIFICATION OF COSTS FIXED AND VARIABLE COSTS
Fixed Cost
Remain constant in “total” amount over a wide range of activity
for a specified period of time
Do not increase or decrease with the volume of production
Example, management salaries, building rent, etc.
CLASSIFICATION OF COSTS
Variable Cost
Costs tend to vary in direct proportion to the volume of output.
Example, direct wages, direct materials, power, royalties, etc.
CLASSIFICATION OF COSTS
Semi variable/ Semi fixed/ Mixed Costs
Partly fixed and partly variable
Example, supervision, maintenance and repairs, telephone
expenses, etc.
CLASSIFICATION OF COSTS
CONTROLLABLE AND NON-CONTROLLABLE COSTS
Controllable Costs
Directly regulated at a given level of management authority
Example, costs of raw material may be controlled by purchasing
in larger quantities.
Non Controllable Costs
Cannot be influenced by the action of a specified member of an
enterprise
Example, factory rent, management salaries, etc.
Misconception: variable costs are controllable and fixed costs are
non-controllable
CLASSIFICATION OF COSTS
HISTORICAL COSTS AND PRE-DETERMINED COSTS
Historical Costs
Past costs which are ascertained after these have been incurred
Pre-determined Costs
Future costs which are ascertained in advance of production on the basis of a specification of all the factors affecting cost
NORMAL AND ABNORMAL COSTS
Normal Cost
Costs normally incurred on expected lines at a given level of output.
Part of cost of production
Abnormal Cost
Not normally incurred at a given level of output
Charged to costing Profit and Loss Account
ELEMENTS OF COST
ROLE OF A COST ACCOUNTANT IN AN ORGANISATION
Establishment of Cost Accounting Department
A cost accountant establishes a cost accounting department and installs a costing system
according to the needs of the business.
Ascertain the requirement of cost information
Cost accountant decides the types of cost information to be produced by the costing system
and its utility for different levels of management.
He also ensures timely availability of information to managers.
Developing a cost manual
Cost accountant develops a cost manual which lays down the objectives and functions of
cost accounting department, the informational needs of various managers, makes cost
analysis, develops various formats in which information will be compiled and submitted to
mangers, etc.
COST SHEET A cost sheet is a statement of cost which is prepared to ascertain
the cost of products.
It shows element wise cost of products.
Proforma-
COST SHEET Problem 1.1 Calculate the Prime Cost, Works Cost, Total Cost of
Production and Cost of sales from the following particulars-
COST SHEET Step 1: Calculation of Prime Cost
COST SHEET Step 2: Calculation of Factory or Works Cost
COST SHEET Step 3: Calculation of Total Cost of Production
COST SHEET Step 4: Calculation of Cost of Sales
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