Cost accounting is a process of recording, analyzing and reporting all of a company’s costs related to the production of a product.The objective of cost accounting is to improve the business’s net profit margins. In other words, It is a process of determining the costs of goods and services.
Features of Cost Accounting:
1. It is the process of accounting to determine costs.
2. It records income and expenditure relating to production of goods and services.
3. It provides costing data that helps in fixing prices of goods and services.
4. It is concerned with cost ascertainment,cost presentation , cost control and cost reduction.
5. It Provides data to management for decision making and budgeting for the future.
COST:
It is defined as the expenditure incurred to produce a given good or service.
COST ACCOUTANCY:
It is the science, art, and practice with which a cost accountant practices cost ascertainment and cost control.
Objectives of cost accounting:
1.Ascertainment of the cost.
2. Fixing Selling Price.
3. Cost Control & Cost Reduction.
4. Helps in Decision making.
5. Records income & expenditure.
6.Provide Statistical data.
7. Preparation of budgets.
8. Maximization of Profit.
Advantages of Accounting:
1] Measuring and Improving Efficiency
2] Identification of Unprofitable Activities
3] Fixing Prices
4] Price Reduction
5] Control over Stock
6] Aids Future Planning
Limitations Of Cost Accounting:
1. It is Expensive.
2. It is not Reliable as it is based on estimates.
3.It is not applicable to Small Concerns because it is more expensive.
Classification of costs:
1.By nature or element
1. Materials: -The materials directly contributed to a product and those easily identifiable in the finished product are called direct materials. For example, paper in books, wood in furniture, etc.
On the other hand,the lower cost items or supporting material used in the production of in a finished product are called indirect materials. E.g: thread used in a garment.
2. Labour: Any wages paid to workers which may directly corelate to any specific activity of production, maintenance, transportation of material, or product, and directly associate in the conversion of raw material into finished goods are called direct labour. Labour costs which cannot be allocated but can be absorbed by a product are called indirect labour.
3. Expenses: - All expenses other than material or labour are called as expenses.The expenses which are specially incurred for a particular Cost Object and can be identified are termed as Direct Expense. E.g., Hire Charges of Special Machinery. Expenses other than direct expenses are known as Indirect Expenses. For e.g., Factory Rent, electricity etc.
2. By Functions
1. Manufacturing Cost: The total costs involved in manufacture, construction and fabrication of units of production.
2. Commercial Cost: The total costs incurred in the operation of a business undertaking other than the cost of manufacturing.
3. By Degree of traceability to product:
1. Direct Cost:Costs that can be directly related to the production of goods and services.
2. Indirect Cost:Costs that cannot be directly associated with the production of goods and services.
4. By changes in Activity or volume:
1. Fixed Cost:Fixed costs are commonly described as those which remain fixed in total amount with increase or decrease in the volume of output for a given period of time.
2. Variable Cost:Variable costs are those which vary in total in direct proportion to the volume of output.
3. Semi Variable Cost: Semi-variable costs are those which are partly fixed and partly variable.For example, telephone expenses
5. By controllability:
1. Controllable Cost: The costs that can be influenced by the action of a specified member of an undertaking, In Generally , all direct costs including direct materials, direct labour and some of the overhead expenses are controllable by lower level of management.
2. Uncontrollable Cost: The Costs that cannot be influenced by the action of a specified member of an undertaking, Most of the fixed costs are uncontrollable.
6. By Normality:
1. Normal Cost: It is the cost which is normally incurred at a given level of output in the conditions in which that level of output is normally attained. It is a part of cost of production.
2. Abnormal Cost: It is the cost which is not normally incurred at a given level of output in the conditions in which that level of output is normally attained. It is not a part of cost of production and charged to costing profit and loss account
7. By Relationship with accounting period:
1. Capital Cost: The cost which is incurred in purchasing an asset either to earn income or increasing the earning capacity of the business is called capital cost.
2. Revenue Cost: If any expenditure is done in order to maintain the earning capacity of the concern such as cost of maintaining an asset or running a business it is revenue expenditure.
8. By Time:
1. Historical Cost: The costs which are ascertained after being incurred are called historical costs.
2. Pre-determined Cost: Such costs are estimated costs i.e., computed in advance of production taking into consideration the previous period costs and the factors affecting such costs. Predetermined cost determined on scientific basis becomes standard cost. Such costs when compared with actual costs will give the reasons of variance and will help the management to fix the responsibility and to take remedial action to avoid its recurrence in future.
9. According to planning:
1. Budgeted Cost: It is the estimated cost of a specified period, calculated using standard cost for the estimated output or activity levels of that period.
2. Standard Cost: It is the cost of best practice that may remain same for a longer period or may not change period to period.
10. By Association with the product:
1. Product Costs: Costs which are traceable to the product and are included in inventory valuation. It comprises direct materials, direct labour and manufacturing overheads in case of manufacturing concerns.
2. Period Costs: Costs which are incurred on the basis of time such as rent, salaries etc.These are charged to the period in which these are incurred and treated as expense.
11. For Managerial decisions
1. Marginal Cost: Marginal cost refers to the change in total cost due to the change in total cost due to the increase or decrease in the volume of output by one unit.
2. Out of pocket Cost/Explicit Costs: This is that portion of the costs which involves payment to outsiders.This is the cost which is payable in cash as against costs such as depreciation which do not involve cash payment.
3. Differential Cost: The change in costs due to change in the level of activity, technology or method of production is known as differential cost.If the change increases the cost, it will be called incremental cost. If there is decrease in cost resulting from decrease in output, the difference is known as decremental cost.
4. Sunk Cost: A cost which is incurred in the past and is not relevant to the current decision making,
5. Imputed or Notional Cost: It is the notional cost to be considered for making costs comparable. E.g. Rent of own building, interest on own capital, etc., are not actually paid but may be taken as costs notionally.
6. Opportunity Cost: It refers to the value of sacrifice made or benefit of opportunity foregone in accepting an alternative course of action.
7. Replacement Cost: It is the ‘current cost’ at which an asset or material can be ‘replaced’ with identical one from the market. It reflects the present market price of such asset or material.
Methods of costing:
Costing methods are those which help a firm to compute the cost of production or services offered by it.
1. Job Costing- When production/work is carried out according to the requirements of customers. It is suitable in all cases where work is undertaken on receiving a customer’s order like a printing press.
2. Contract Costing- This method of costing is used in construction industry to work out the cost of contract undertaken. For example, cost of constructing a bridge, commercial complex, residential complex, highways etc is worked out by use of this method of costing.
3. Batch Costing- It is an extension of Job Costing. It is a form of job costing that is applied when the articles are produced in batches, i.e., a group of like units are produced. Here cost per unit is determined by dividing the cost of the batch by the number of units produced in the batch.
4 Process Costing:It is called continuous costing. In certain industries, the raw material passes through different processes before it takes the shape of a final product.
In other words, the finished product of one process becomes the raw material for the subsequent process. Process costing is used in such industries.A separate account is opened for each process to find out the total cost as well as cost per unit at the end of each process. Process costing is applied to continuous process industries such as chemicals, textiles, paper, soap, lather etc.
5 Unit Costing:This method is also known as single or output costing. It is suitable to industries where production is continuous and units are identical. The objective of this method is to ascertain the total cost as well as the cost per unit. A cost sheet is prepared taking into account the cost of material, labour and overheads. Unit costing is applicable units brick making , manufacturing cycles,radios, washing machines etc.
6. Operating Costing- This type of costing method is used in service sector to work out the cost of services offered to the consumers. For example, operating costing method is used in hospitals, power generating units, Transportation sector etc.
7.Multiple Costing:It refers to a combination of two or more of the above methods of costing. It is adopted in industries where several parts are produced separately and assembled to a single product.
Techniques Of Costing:
1. Marginal Costing: This technique is based on the assumption that the total cost of production can be divided into fixed and variable. Fixed costs remain same irrespective of the changes in the volume of production while the variable costs vary with the level of production, i.e. they will increase if the production increases and decrease if the production decreases. Variable cost per unit always remains the same.
2.Absorption Costing –It is also referred to as full costing. It is a costing technique in which all manufacturing cost (fixed and variable) are considered as cost of production and are used in determining the cost of goods manufactured and inventories. The fixed production costs are treated as part of the actual production costs.
3.Standard Costing:These are predetermined costs relating to material, labour and overheads. They are computed for all elements of costs such as material, labour and overheads. The main objective of fixation of standard cost is to have benchmark against which the actual performance can be compared. This means that the actual costs are compared with the standards. The difference is called as ‘variance’. If actual costs are more than the standard, the variance is adverse whereas if actual costs are less than the standard, the variance is favourable.Standard costing, thus is an important technique of cost control and reduction.
4. Budget and Budgetary control: Budget is defined as a quantitative and/ or a monetary statement prepared prior to a defined period of time for the policies during that period for the purpose of achieving a given objective. Budget is always prepared for future and that too for a defined future. Budgetary control involves preparation of budgets and continuous comparison of actual with budgets so that necessary corrective action can be taken.
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