COST ACCOUNTING

COST ACCOUNTING

“cost is the measurement in monitory terms of the resources that used for the propose of production or rendering services”

(ICW ACT)

cost accounting is the part of accounting which identifies, defines, measures,reports, and analysis

the various elements of direct cost and indirect cost associated with manufacturing of and providing of goods or services. In the process of accumulating costs for inventory valuation and income determination the needs of external users and management are fulfilled. Cost accounting is the process of determining and accumulating the cost of product or activity. It is a process of accounting for the in currence and the control of cost. It also covers classification, analysis, and interpretation of cost. In other words, it is a system of accounting, which provides the information about the ascertainment, and control of costs of products, or services. It measures the operating efficiency of the enterprise.

The Institute of Cost and Management Accounting, London defines “Cost accounting is the process of accounting from the point at which expenditure is incurred or committed to the establishment of its ultimate relationship with cost centres and cost units. In the widest usage, it embraces the preparation of statistical data, application of cost control methods and the ascertainment of profitability of activities carried out or planned”

OBJECTIVES

1. product costing: ascertainment of cost is the one of important one of the important objective of cost accounting. The determination of of total product cost and cost per unit are very important for inventory valuation, product pricing and managerial decision making.
2. Planning and control: the creation of useful cost data and information for planning and control by management is another important objective of cost accounting. The tools of managerial planning and control are budgeting and standard costing.
3. Decision making: yet another objective of cost accounting is to provide information for both short and long term decisions. Decision making primarily involves choice out of available alternatives.
   (i) Determination of cost-volume-profit relationship.
   (ii) Make or buy a component
   (iii) Shut down or continue operation at a loss
   (iv) Continuing with the existing machinery or replacing them by improved and economical machines.

4. Ascertaining costing profit :Cost accounting helps in ascertaining the costing profit or loss of any activity on an objective basis by matching cost with the revenue of the activity.
5. Facilitating preparation of financial and other statements :Cost accounting helps to produce statements at short intervals as the management may require. The financial statements are prepared generally once a year or half year to meet the needs of the management. In order to operate the business at high efficiency, it is essential for management to have a review of production, sales and operating results. Cost accounting provides daily, weekly or monthly statements of units produced, accumulated cost with analysis. Cost accounting system provides immediate information regarding stock of raw material, semi- finished and finished goods. This helps in preparation of financial statements.

DIFFERENCE BETWEEN FINANCIAL ACCOUNTING AND COST ACCOUNTING

1. OBJECTIVE: the main objective of financial accounting is to provides information about the financial performance and financial position of the business , the main objective of cost accounting is to provides information of ascertainment of cost to control cost and for decision making about the cost.
2. NATURE : financial accounting classifies records, presents and interprets transactions in terms of money. . the cost accounting classifies, records, presents, and interprets in a significant manner the material, labour and overheads cost.
3. RECORDING OF DATA : Financial Accounting records Historical data , cost accounting records and presents the estimated/budgeted data. It makes use of both the historical costs and per-determined costs.
4. USERS OF INFORMATION : The users of financial accounting statements are shareholders, creditors, financial analysts and government and its agencies, etc. The cost accounting information is used by internal management at different levels.
5. ANALYSIS OF COSTS AND PROFITS : financial accounting shows the profit/ loss of the organisation. Cost accounting provides the details of cost and profit of each product, process, job, contracts, etc.
6. TIME PERIOD : Financial accounting Statements are prepared for a definite period, usually a year. cost accounting reports and statements are prepared as and when required.

IMPORTANCE OF COST ACCOUNTING

The limitation of financial accounting has made the management to realise the importance of cost accounting. The importance of cost accounting are as follows:

1. Importance to Management :Cost accounting provides invaluable help to management. It is difficult to indicate where the work of cost accountant ends and managerial control begins. The advantages are as follows :

• Helps in ascertainment of cost :

Cost accounting helps the management in the ascertainment of cost of process, product, Job, contract, activity, etc., by using different techniques such as Job costing and Process costing.

• Aids in Price fixation :

By using demand and supply, activities of competitors, market condition to a great extent, also determine the price of product and cost to the producer does play an important role. The producer can take necessary help from his costing records.

• Helps in Cost reduction :

Cost can be reduced in the long-run when cost reduction programme and improved methods are tried to reduce costs.

• Elimination of wastage

As it is possible to know the cost of product at every stage, it becomes possible to check the forms of waste, such as time and expenses etc., are in the use of machine equipment and material.

• Helps in identifying unprofitable activities :

With the help of cost accounting the unprofitable activities are identified, so that the necessary correct action may be taken.

• Helps in checking the accuracy of financial account :

Cost accounting helps in checking the accuracy of financial account with the help of reconciliation of the profit as per financial accounts with the profit as per cost account. Notes

• Helps in fixing selling Prices :

It helps the management in fixing selling prices of product by providing detailed cost information.

• Helps in Inventory Control :

Cost furnishes control which management requires in respect of stock of material, work in progress and finished goods.

• Helps in estimate Costing records provide a reliable basis upon which tender and estimates may be prepared.

2. Importance to Employees :Worker and employees have an interest in which they are employed. An efficient costing system benefits employees through incentives plan in their enterprise, etc. As a result both the productivity and earning capacity increases.

3. Cost accounting and creditors Suppliers, investor’s financial institution and other moneylenders have a stake in the success of the business concern and therefore are benefited by installation of an efficient costing system. They can base their judgement about the profitability and prospects of the enterprise upon the studies and reports submitted by the cost accountant.

4. Importance to National Economy An efficient costing system benefits national economy by stepping up the government revenue by achieving higher production. The overall economic developments of a country take place due to efficiency of production.

5. Data Base for operating policy Cost Accounting offers a thoroughly analysed cost data which forms the basis of formulating policy regarding day to day business, such as:

(a) Whether to make or buy decisions from outside?

(b) Whether to shut down or continue producing and selling at below cost?

(c) Whether to repair an old plant or to replace it?

LIMITATIONS OF COST ACCOUNTING

• It is expensive because analysis, allocation and absorption of overheads require considerable amount of additional work.
• The results shown by cost accounts differ from those shown by financial accounts. Preparation of reconciliation statements frequently is necessary to verify their accuracy. This leads to unnecessary increase in workload.

• It is unnecessary because it involves duplication of work. Some industrial units are functioning efficiently without any costing system.

• Costing system itself does not control costs. If the management is alert and efficient, it can control cost without the help of the cost accounting. Therefore it is unnecessary.