Costing chapter 1 basics of costing

COST,COSTING,COST ACCOUNTING & COST ACCOUNTANCY
Cost can be defined as
The measurement of the resources used to
manufacture a product or to provide services.
This includes :
Raw material used to manufacture a product
Labour used to manufacture a product
Other expenses used to manufacture a product
Expenses incurred to store the raw material
Expenses incurred to store the finished product
Expenses incurred to sell the product

CostAccounting
recording cost spent on any process, service, product or anything else in the
organization.
examining cost spent on any process, service, product or anything else in the
organization.
summarizing cost spent on any process, service, product or anything else in the
organization.
study the cost spent on any process, service, product or anything else in the
organization.
Costing
It is the process of ascertainment of cost.

CostAccountancy
It is the application of :
Cost and cost accounting principles
Methods and techniques of cost control
Ascertainment of profitability
Presentation of information to the management for
decision making

LIMITATIONSOF FINANCIAL ACCOUNTING
Financial accounting provides the information about the financial activities as a
whole and not product or job-wise, department-wise etc.
Control of cost is not possible since the costs are known at the end of the financial
year or a specified period of time. So nothing can be done to control either the
account of expense or the cost.
Financial information relates to past records and all financial decisions are taken on
the basis of past financial data which may be incorrect.
Financial accounting does not record the price fluctuations or change in price level.
As a result it does not present the correct information
Total cost (i.e., fixed cost, variable cost, direct cost and indirect cost of a product)
depends on many factors, all such factors cannot be supplied by financial
accounting.

LIMITATIONSOF FINANCIAL ACCOUNTING
Without proper knowledge of principles and conventions of accounting it is not
possible to analyse the financial data to take any financial decision.
No Uniformity regarding Accounting Principles. As there are IndianAccounting
Standards and International Accounting Standards which differ a lot.
Financial accounting presents only profit or loss and financial positions of the
business as a whole. So actual performance cannot be compared with the budgeted
figure
Sometimes profit may be reduced in order to reduce tax and to avoid bonus to the
employees. In the same way, more profit may be shown to issue new equity shares or
to pay more dividend to attract the shareholders, creditors and money lenders.

ORIGIN OF COSTING
As the traditional financial accounting does not provide the necessary information
for carrying on an efficient business, costing was introduced.
Although the cost accounting principles were given importance and were developed
before the Second World War, Cost Accounting principles were introduced at the
beginning of 14th century. But by the end of the 19th century the current cost
accounting procedure was set up.
However, when industrialization speeded up, these businesses had to differentiate
the ‘variable costs’ from ‘fixed costs’. Variable costs are those costs which are
directly related to the production and vary quantitatively. Fixed costs are those costs
which are not directly related to the production of goods or services. Some examples
of fixed costs are salaries, depreciation, rent, insurance premium, etc.
Managers and businessmen found costing necessary to be undertaken for decision
making, pricing, and product development. Thus modern cost accounting was
originated.

ORIGIN OF COSTING
All businesses and organization can keep track of their activities and costs with the
help of cost accounting.
Thus cost accounting is a branch of financial accounting. Though cost accounting
emerged, the financial accounting has not lost it’s importance.
Cost helps to
Take appropriate decisions
Price a product
Develop a product

OBJECTIVES OF COST ACCOUNTING
To Ascertainment the cost of aproduct
To analysis of cost viz, fixed, variable, semi – variable, direct costsand indirect
costs, etc.
To detect the wastage of material, time, expenses and measures to control them.
To fix the selling price of a product once costs are ascertained.
To determine the profit and measures to maximize theprofit.
To control the stocks of raw material, work-in-progress and finished product.
To represent and interpret the data to the management for decision making.
To prepare the budgets and implement them.
To formulate the plans regarding wages and the incentives thereon.
To organise cost reduction programmes through management.

ADVANTAGES OF COST ACCOUNTING
To Ascertain the cost of a product and improve the efficiency.
To understand the profitable and unprofitable activities and take decisions thereon.
To fix a price for its products on the basis of the cost of production.
Costs, properly ascertained, will guide management to reduce the price even below
the total cost.
To make proper planning of work and avoid overwork and idle time.
To have a control on excess storage and optimum stock levels can be maintained
To reveal the reason of losses, and to improve the capacity of production.
To prepare the budgets and implement them.
To formulate the plans regarding wages and the incentives thereon.
To reconcile the cost statements with those of financial statements.

DISADVANTAGES OF COST ACCOUNTING
It is expensive for small concern. So small concern do not afford to implement it.
It is not necessary as without costing many industries have yet prospered.
Unnecessary paper work
Lack of uniformity
Unable to determine taxliability

DIFFERENCE BETWEEN COST ACCOUNTING AND FINANCIALACCOUNTING
Definition
Cost Accounting is the art and science of
applying costing methods and techniques
so as to reduce the cost of products and
earn more profits.
CostAccounting FinancialAccounting
Definition
Financial accounting is the art and science
of accumulating, summarizing, recording
and analysis business transactions as per
the principles and rules of accounts.
Objective
Provides information to management of
decision making
Objective
Prepare financial statements to know the
profit or loss of the business and the
fianancial position of the business.
Scope
Maximum use is for internal purpose. The
records are used by the management for
reduction of cost and improving the
productivity.
Scope
It is useful for management as well as
creditors, money lenders and shareholders
as well.
Basis
Cost Accounting is based on standards
and actuals
based on
Basis
Financial accounting is not
estimates but only on actuals

DIFFERENCE BETWEEN COST ACCOUNTING AND FINANCIALACCOUNTING
Period
There is no specific period for cost
accounting. It is done as per requirement
of the management.
CostAccounting FinancialAccounting
Period
Financial accounting has a fixed period of
one year, which is compulsory to find the
profit of the business for tax calculation.
Cost Reduction
Cost accounting helps management to
reduce the cost of production by way of
costing methods and techniques.
Cost Reduction
Financial accounting does not deal with
cost reduction technique and methods.
Efficiency
Cost Accounting measures the efficiency
of the job, labour, department, idle time,
etc. which helps management to improve
the efficiency of the business
Efficiency
Financial Accounting has no such tools to
measure the efficiency of the business, as
it maintains the records of the business as
a whole.

COST UNIT
A cost unit is defined as “a unit of quantity of product, service or
time (or a combination of these) in relation to which costs may
be ascertained or expressed”.
In other words, a cost unit is a standard or unit of measurement
of the goods manufactured or service rendered.
Cost unit may be in terms of number, length, area, weight,
volume, time and value.

CHARACTERISTICS OF COST UNIT
Expenditure can be conveniently associated with unit.
It must be appropriate or natural to business operations and
the product.
It must be certain or definite and not changing from time to
time.
It must be simple to understand and to quote.
It must have universal acceptability.

TYPES OF COST UNIT
There are two types of Cost Units
Simple Cost Unit : It involves the use of a single standard or
unit of measurement of the goods manufactured e.g., per piece,
per kilogram, per quintal, per tonne, per gallon, per meter etc.
Composite Cost Unit : It is a combination of two simple units
e.g., per passenger-kilometer, per tonne-kilometer, per kilowatt-
hour etc.

COST CENTRE
The Institute of Cost and Management Accountants, London has defined cost
center as “a location, a person or an item of equipment (or group of these) in
or connected with an undertaking in relation to which costs may be
ascertained and used for the purpose of cost control.”
Thus cost center is “a location, a person or an item of equipment (or group of
these) for which costs may be ascertained.
It may be any place, person, machine, department, function, activity within the
organisation through which costs can be allocated.

ROLE OF A COST ACCOUNTANT IN ANORGANISATION
A cost accountant in a manufacturing organisation plays several
important roles
Establish a cost accounting department in his concern.
ascertain the requirement of cost information which may be useful
to organisational managers
develop a manual, which specifies the functions to be performed
by the cost accounting department

Usually, the functions of the cost accounting department include :
Cost Ascertainment : Classification of costs as direct and indirect
are ascertained. Indirect cost includes various overheads, viz
Factory overheads, Office & Administrative Overheads, Selling
Overheads and Distribution overheads.
Cost comparison : The standard cost so determined may be
compared with the actual cost to determine the variances. Cost
accountant ascertains the reasons for the occurrence of these
variances for taking suitable action.
Cost Analysis : Cost accountant also plays a key role in the
preparation of cost reports that help the business concern in
reviewing it’s own performance and in identifying the weak areas,
where enough control measures may be taken in future.

Cost Reduction : With the help of cost data and reports the cost
accountant can help the management to reduce the costs.
Cost Control : Reduction of the cost simultaneously will control
the cost of every aspect of the production.

Costing chapter 1 basics of costing

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