The historical nature of historical costs but also with pre- financial accounting can be easily understood determined costs. This is because in the context of the purposes for which it cost accounting does not end with was designed. It extends to plans and policies to improve performance in the future.
Format of Financial accounting has a single uniform Cost accounting has varied forms presenting format of presenting information, i.
Types of Financial accounting records only external Cost accounting not only records transactions transactions like sales, purchases, receipts, etc. It does not record internal i nt ernal or i nt er-depart ment al transactions. Types of Financial accounting prepares general purpose Cost accounting generates special statements statements like Profit and Loss Account and purpose statements and reports like prepared Balance Sheet.
This is not so. Its applicat ions are in fact much wider. All t ypes of act ivit ies, manufact uring and non- manufact uring, in which costs are incurred and monet ary value is involved, should consider t he use of cost account ing. It is only a mat t er of recognit ion by t he management of t he applicabilit y of t hese cost ing concepts and t echniques in t heir own fields of endeavour. In ot her words, t he emergence of cost account ing is because of t he limit at ions of financial account ing.
Cost account ing has many advant ages but t he ext ent of t he advant ages obt ained will depend upon t he efficiency wit h which cost syst em is inst alled and also t he ext ent to which t he management is prepared to accept t he syst em.
The principal advant ages of cost account ing are as follows: Advantages to Management 1. Reveals prof i t able and unprof i t able act i vi t i es. A syst em of cost account ing reveals profit able and unprofit able act ivit ies. On t his informat ion, management may t ake st eps to reduce or eliminat e wast ages and inefficiencies occurring in any form such as idle t ime, under-ut ilisat ion of plant capacit y, spoilage of mat erials, etc.
Helps i n cost cont rol. Cost account ing helps in cont rolling costs wit h special t echniques like st andard cost ing and budget ary cont rol. Helps i n deci si on maki ng.
It supplies suit able cost dat a and ot her relat ed informat ion for managerial decision-making, such as int roduct ion of a new product line, det ermining export price of products, make or buy a component , etc.
Gui des i n f i xi ng selli ng pri ces. Cost is one of t he most import ant factors to be considered while fixing prices. A syst em of cost account ing guides t he management in t he fixat ion of selling prices, part icularly during depression period when prices may have to be fixed below cost.
Helps i n i nvent ory cont rol. Perpet ual inventory syst em, which is an int egral part of cost account ing. Ot her inventory cont rol t echniques like ABC analysis, level set t ing, etc. Ai ds i n f ormulat i ng poli ci es. Cost ing provides such informat ion as enables t he management to formulat e product ion and pricing policies and preparing est imat es of cont racts and t enders. Helps i n cost reduct i on. It helps in t he int roduct ion of a cost reduct ion programme and finding out new and improved ways to reduce costs.
Reveals i dle capaci t y. A concern may not be working to full capacit y due to reasons such as short age of demand, machine breakdown or ot her bot t lenecks in product ion.
A cost account ing syst em can easily work out t he cost of idle capacit y so t hat management may t ake immediat e st eps to improve t he posit ion. Checks t he accuracy of f i nanci al account s. Cost account ing provides a reliable check on t he accuracy of financial accounts wit h t he help of reconciliat ion bet ween t he t wo at t he end of t he account ing period. Prevent s f rauds and mani pulat i on. Cost audit syst em, which is a part of cost account ancy, helps in preventing manipulat ion and frauds and t hus reliable cost dat a can be furnished to management and ot hers.
This results not only in higher product ivit y but also higher earnings for workers. Advantages to Society An efficient cost syst em is bound to lower t he cost of product ion. The benefits of cost reduct ion and cost cont rol accrue to t he public at large in t he form of lower prices of products and services.
Advantages to Government Agencies and Others A cost syst em produces ready figures for use by government , wage t ribunals, t rade unions, etc. These are as follows: 1. I t i s unnecessary. It is argued t hat maint enance of cost records is not necessary and involves duplicat ion of work.
It is based on t he premise t hat a good number of concerns are funct ioning prosperously wit hout any syst em of cost ing. This may be t rue, but in t he present world of compet it ion, to conduct a business wit h ut most efficiency, t he management needs to know det ailed cost informat ion for its decision-making.
Only a cost account ing syst em can serve t his need of t he management and t hus help in t he more efficient conduct of a business.
I t i s expensi ve. It is point ed out t hat inst allat ion of a cost ing syst em is quit e expensive which only large concerns can afford.
It is also argued t hat inst allat ion of t he syst em will involve additional expendit ure which will lead to a diminut ion of profits. In t his respect , it may be said t hat a cost ing syst em should be t reat ed as an invest ment and t he benefits derived from t he syst em must exceed t he amount spent on it. It should not prove a burden on t he finances of t he company. I t i s i nappli cable. Anot her argument somet imes put forward is t hat modern met hods of cost ing are not applicable to many t ypes of indust ry.
This plea is not very apt. The fault lies in an at t empt to int roduce a readymade cost ing syst em in a firm. A cost ing syst em must be specially designed to meet t he needs of a business. Only t hen t he syst em will work successfully and achieve t he object ives for which it is introduced. In fact, applications of costing are very wide.
All types of act ivit ies, manufacturing and non-manufact uring, should consider t he use of cost account ing. The failure of a cost ing syst em in some concerns is quot ed as an argument against its int roduct ion in ot her undert akings.
This is a very fallacious argument. If a syst em does not produce t he desired results, it is wrong to jump to t he conclusion t hat t he syst em is at fault. The reasons for its failure should be probed. In order to make t he syst em a success, t he ut ilit y of t he syst em should be explained and t he cooperat ion of t he employees should be sought by convincing t hem t hat t he syst em is for t he bet t erment of all.
In order to meet t he special needs of a business, a cost ing syst em has to be specially devised to give it a blend of efficiency and economy. To st art wit h, it is import ant to make cost benefit analysis, i.
The benefits from t he syst em must exceed t he amount spent on it. The management must feel t he need for it and should be able to make full use of t he informat ion available from t he syst em in t he conduct of business.
In ot her words, t he syst em should be just ified on t he basis of its value to management. Steps in Installation The inst allat ion of a cost ing syst em requires t he following st eps to be t aken: 1. Preliminary invest igat ions should be made relat ing to t he t echnical aspects of t he business.
For inst ance, t he nat ure of t he product and met hods of product ion will det ermine t he t ype of cost ing syst em to be applied. The organisat ion st ruct ure of t he business should be st udied to ascert ain t he scope of aut hority of each execut ive.
The existing organisat ion should be disturbed to t he minimum as may be advisable aft er full considerat ion. The met hods of purchase, storage and issue of mat erials should be examined and modified as per t he requirements. The existing met hods of remunerat ing labour should be examined for t he purpose of int roducing any incent ive plans. Forms and account ing records should be so designed so as to involve minimum clerical labour and expendit ure.
The size and layout of t he factory should be st udied. The cost ing syst em should be effecit ve in cost cont rol and cost reduct ion. Cost ing syst em should be simple and easy to operat e. Unnecessary det ails should be avoided. The inst allat ion and operat ion of t he syst em should be economical. The syst em should be int roduced gradually. Practical Difficulties Apart from t echnical cost ing problems, a cost account ant is confront ed wit h cert ain pract ical difficult ies in inst alling a cost ing syst em.
These are: 1. Lack of support of t op management. In order to make t he cost ing syst em a succss, it must have t he whole-heart ed support of every member of t he management.
Many a t ime, t he cost ing syst em is int roduced at t he behest of t he Managing Director or t he Financial Director wit hout t he support of funct ional managers.
They view t he syst em as an int erference in t heir work and do not make use of t he syst em. Before t he syst em is inst alled, t he cost account ant should ensure t hat t he management is fully commit t ed to t he cost ing syst em.
A sense of cost consciousness should be creat ed in t heir minds by explaining t hem t hat t he syst em is for t heir benefit. Resi st ance f rom t he account i ng st af f. The exist ing account ing st aff may not welcome t he new syst em.
This may be because t hey look wit h suspicion at a syst em which is not known to t hem. The cooperat ion of t he employees should be sought by convincing t hem t hat t he syst em is needed to supplement t he financial account ing syst em and t hat it is for t he bet t erment of all.
Non-cooperat i on of worki ng and supervi sory st af f. Correct act ivit y dat a which is supplied by supervisory st aff and workers is necessary for a successful cost ing syst em. They may not cooperat e and resist t he addit ional paper work arising as a result of t he int roduct ion of t he syst em. Such resist ance generally arises out of ignorance. Proper educat ion should be given to t he st aff regarding benefits of t he syst em and t he import ant roles t hey have to play to make it successful.
Short age of t rai ned st af f. In t he init ial st ages, t here may be short age of t rained cost ing st aff. The st aff should be properly t rained so t hat cost ing depart ment can run efficient ly. It is, t herefore, not easy to define or explain t his t erm wit hout leaving any doubt concerning its meaning. However, some of t he definit ions of cost are given below: 1. Harper 4. Cost Vs. But cost should be dist inguished from expense and loss. It is t hat cost which has been applied against revenue of a part icular account ing period in accordance wit h t he principle of matching costs to revenue.
In ot her words, an expense is t hat port ion of t he revenue earning pot ent ial of an asset which has been consumed in t he generat ion of revenue. Unexpired or unconsumed part of t he cost is recorded as an asset in t he balance sheet. Such an unexpired cost is convert ed into an expense when it expires while helping to earn revenue.
Depreciat ion of plant is an example of expired cost while prepaid insurance is an example of unexpired cost. A loss is an expired cost result ing from t he decline in t he service pot ent ial of an asset t hat generat ed no benefit to t he firm.
Obsolescence or dest ruct ion of stock by fire are examples of loss. Relation of Cost, Expense and Loss.
Thus, a cost cent re refers to a sect ion of t he business to which costs can be charged. It may be a locat ion a depart ment , a sales area , an it em of equipment a machine, a delivery van , a person a salesman, a machine operator or a group of t hese t wo automat ic machines operat ed by one workman.
The main purpose of ascert aining t he cost of a cost cent re is cont rol of cost. Cost cent res are primarily of t wo t ypes: a Personal cost cent re— which consists of a person or a group of persons, b I mpersonal cost cent re— which consists of a locat ion or an it em of equipment or group of t hese.
From funct ional point of view, cost cent res may be of following t wo t ypes: a Product i on cost cent re— This is t hat cost cent re where act ual product ion work t akes place. Examples are melt ing shop, machine depart ment , welding depart ment , finishing shop, etc. Examples of service cost cent res are power house, tool-room, stores depart ment , repair shop, cant een, etc.
Costs incurred in service cost cent res are of indirect t ype. A cost account ant sets up cost cent res to enable him to ascert ain t he costs he needs to know. A cost cent re is charged wit h all t he costs t hat relat e to it ; e.
The purpose of ascert aining t he cost of a cost cent re is cost cont rol. The person in charge of a cost cent re is held responsible for t he cont rol of cost of t hat cent re. Cost unit is a st ep furt her which breaks up t he cost of a cost cent re into smaller sub-divisions and helps in ascert aining t he cost of saleable products or services. For example, in a sugar mill, t he cost per tonne of sugar may be ascert ained, in a t ext ile mill t he cost per met re of clot h may be ascert ained.
In short , cost unit is unit of measurement of cost. All sorts of cost units are adopt ed, t he crit erion for adopt ion being t he applicabilit y of a part icular cost unit to t he circumst ances under considerat ion. Broadly, cost units may be : i Uni t s of product i on, e. A few more examples of cost units in various indust ries are given below: Indust ry Normal Cost Unit Cement Tonne of cement Chemicals Tonne, kilogram, lit re, gallon, etc.
A cost object may be a product , service, act ivit y, depart ment or process etc. Examples of cost objects are given below: Cost object Examples Product Car, shaving razor, TV Service Telephone hot line, t axi service, elect ricit y Process Melt ing process in a st eel mill, weaving process in a t ext ile mill.
Act ivit y Developing a webside on t he Int ernet , Purchasing raw mat erial. It is a syst emat ic placement of like it ems toget her according to t heir common feat ures. There are various ways of classifying costs as given below. Each classificat ion serves a different purpose.
Classification into Direct and Indirect Costs Costs are classified into direct costs and indirect costs on t he basis of t heir ident ifiabilit y wit h cost units or jobs or processes or cost cent res. Di rect cost s. These are t hose costs which are incurred for and convenient ly ident ified wit h a part icular cost unit , process or depart ment.
Cost of raw mat erials used and wages of machine operator are common examples of direct costs. To be specific, cost of st eel used in manufact uring a machine can be convenient ly ascert ained.
It is, t herefore, a direct cost. Similarly, wages paid to a t ailor in a readymade garments company for st itching a piece of t rouser is a direct cost because it can be easily ident ified in t he cost of a t rouser. I ndi rect cost s. These are general costs and are incurred for t he benefit of a number of cost units, processes or depart ments.
These costs cannot be convenient ly ident ified wit h a part icular cost unit or cost cent re. Depreciat ion of machinery, insurance, light ing, power, rent , managerial salaries, mat erials used in repairs, etc. For example, depreciat ion of machine for st itching a piece of t rouser cannot be known and t hus it is an indirect cost. Costs are not t raced or ident ified direct ly wit h a cost unit for one of t he t hree reasons: 1.
It is impossible to do so; e. It is not convenient or feasible to do so; e. Management chooses not to do so; i. Alt ernat ively, it is t reat ed as a part of t he cost of direct mat erial purchased. An it em of cost may be direct in one case and t he same may be indirect in anot her case. It is t he nat ure of business and t he cost unit chosen t hat will det ermine whet her a part icular cost is direct or indirect.
For example, depreciat ion of plant used by a cont ractor at sit e is direct cost whereas depreciat ion of plant used in a factory is indirect cost. It is because in t he factory, plant would probably benefit more t han one cost unit and it may not be convenient to allocat e depreciat ion to various cost units wit h any degree of accuracy. This classificat ion is import ant from t he point of view of accurat e ascert ainment of cost.
Direct costs of a product can be convenient ly det ermined while t he indirect costs have to be arbit rarily apport ioned to various cost units. For example, in readymade garments, t he cost of clot h and wages of t ailor are accurat ely ascert ained wit hout any difficult y and are t hus direct costs.
But t he rent of factory building, managerial salaries, etc. Classification into Fixed and Variable Costs Costs behave different ly when level of product ion rises or falls. Cert ain costs change in sympat hy wit h product ion level while ot her Fi xed Costs costs remain unchanged. The charact erist ics of fixed costs are : a Tot al fixed cost does not change wit hin a relevent range of out put. Behaviour of Fixed Costs. These costs t end to vary in direct proport ion to t he volume of out put.
In ot her words, when volume of out put increases, tot al variable cost also increases, and vice versa, when volume of out put decreases, tot al variable cost also decreases.
But , t he variable cost per unit remains fixed. It is shown in Fig. Cost Accounting Books: 6. Financial and Management Accounting Books: Environmental Accounting Books: Here ends our selection of free Accounting books in PDF format.
We hope you liked it and already have your next book! Do you want to read about another topic? Art and Photography. And by-products. However, cost accounting texts written expressly for health care are scarce.
This book thoroughly covers the essentials of cost accounting from a health care perspective, in-cluding all of the basic tools of cost accounting common to all industries, using health care examples. Subject 1. Introduction to Cost and Management Accounting 2. Material Cost 3. Labour Cost 4. Direct Expenses and Overheads 5. Introduction to Cost Accounting by. In order to provide our services we rely on a series of essential cookies to access our features.
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