Chapter outcomes:
1.Meaning and nature of cost accounting;
2.Scope of cost accounting;
3.Objectives of cost accounting;
4.Advantages of cost accounting;
5.Limitations of cost accounting;
6.Elements of costs;
7.Cost sheet;
8.Practical exercises;
Meaning of cost accounting
Cost accounting is a branch of accounting and has been
developed due to limitations of financial accounting.
Cost accounting is the classifying, recording and appropriate
allocation of expenditure for the determination of the costs
of products and services, and for the presentation of suitably
arranged data for the purposes of control and guidance of
managements.
Cost accounting is the application of costing and cost
accounting principles, methods, and techniques to the
science, art and practice of cost control and the
ascertainment of profitability.
Features of cost accounting
The following are the main features of cost accounting:
1. It is a process of accounting for costs;
2. It records income and expenditure relating to production
of goods and services;
3. It provides statistical data on the basis of which future
estimates are prepared and quotations are submitted;
4. It is concerned with cost ascertainment and cost control;
5. It establishes budgets and standards so that actual cost
may be compared to find out deviations or variances;
6. It involves the preparation of right information to the
right person at the right time so that it may be helpful to
management for planning, evaluation of performance,
control and decision making.
Scope of cost accounting
The scope of cost accounting includes the following:
1. Cost ascertainment:
It deals with the collection and analysis of expenses, the
measurement of production of the different products at different
stages of manufacture and the liming up of the production with the
expenses.
1.
Cost determination:
It is the process of accounting for cost which begins with
recording of expenditure and ends with the preparation of
statistical data. It is formal mechanism by means of which costs of
products or services are ascertained and controlled.
1.
Cost control: It is the guidance and regulation by executive
action of the costs of operating an undertaking. It aims at
guiding the actual towards the line of targets.
Objectives of cost accounting
To ascertain the cost per unit of the different products
manufactured by a business concern;
2. To provide a correct analysis of cost both by process or
operations and by different elements of cost;
3. To disclose sources of wastage whether of material, time
or expense or in the use of machinery, equipment and
tools and to prepare such reports which may be necessary
to control such wastage;
4. To provide requisite data and serve as a guide to price
fixing of products manufactured or services rendered;
5. To ascertain the profitability of each of the products and
advise the management as to how these profits can be
maximized.
1.
Objectives of cost accounting- contd.
6. To advise the management on future expansion policies
and proposed capital projects;
7. To present and interpret data for management planning,
evaluation of performance and control;
8. To help in the preparation of budgets and implementation
of budgetary control;
9. To guide management in the formulation and
implementation of incentive bonus plans based on
productivity and cost savings;
10. To supply useful data to management for taking various
financial decisions such as introduction of new products,
replacement of labour by machines.
Advantages of cost accounting
1. It helps the management in determining the cost of production
2.
3.
4.
5.
6.
of a given volume of output and thereby fixing the prices;
It helps the management in identifying the profitable and
unprofitable lines of business;
It provides information upon which estimates and tenders are
based;
It guides future production policies;
It provides valuable information for management decision
making and forward planning;
With effective cost control methods, cost accounting helps the
management to increase the overall profitability of the
organization.
Limitations of cost accounting
The following are the main limitations of cost accounting:
1. Cost accounting lacks a uniform procedure – different cost
accountant may have different procedures;
2. There are a large number of conventions, estimates and
flexible factors such as classification of costs into its
elements, issue of materials on average or standard prices,
apportionment of overhead expenses, etc.
3. For getting the benefits of cost accounting, many formalities
are to be observed by a small and medium size concerns;
4. The contribution of cost accounting for handling futuristic
situations has not been much
Elements of costs
The following are main elements of costs:
1. Direct materials: Direct materials are those materials which
can be identified in the product and can be conveniently
measured and directly charged to the product. Thus, these
materials directly enter the production and form a part of the
finished product.
2. Direct labour: Direct labour is all labour expended in altering
the construction, composition, confirmation or condition of
the product. In simple words, it is that labour which can be
conveniently identified or attributed wholly to a particular
job, product or process or expended in converting raw
materials into finished goods.
3. Overheads:
Overheads may be defined as the aggregate of the cost of indirect
materials, indirect labour and indirect expenses. Overheads
comprise of all expenses incurred for or in connection with the
general organization of the whole or part of the undertaking. The
main groups into which overheads may be sub-divided are:
(i) Manufacturing overheads;
(ii) Administrative overheads;
(iii) Selling overheads;
(iv) Distribution overheads; and
(v) Research and development overheads.
Cost sheet
Cost sheet is a statement designed to show the output of a
particular accounting period along with break-up of costs. The
data incorporated in cost sheet are collected from various
statements of accounts which have been written in cost accounts,
either day-to-day or regular records.
Cost sheet is a memorandum statement. Therefore, it does not
form part of double entry cost accounting records. In spite of this,
the relationship between cost sheet and financial accounts which
are maintained on double entry system is very important as cost
sheet drives its data from financial accounting.
Advantage of Cost sheet
The main advantages of a cost sheet are:
1. It discloses the total cost and the cost per unit of the units
produced during the given period;
2. It enables a manufacturer to keep a close watch and control
over the cost of production;
3. By providing a comparative study of the various elements of
current cost with the past results and standards costs, it is
possible to find out the causes of variations in the costs and to
eliminate the variations;
4. It acts as a guide to the manufacture and helps him in
formulating a definite useful production policy;;
5. It helps the businessman to submit quotations with reasonable
degree of accuracy against tenders for the supply of goods.