Basics of Costing

1.1 INTRODUCTION

Meaning and definition

1) Cost as a noun- the amount of expenditure (actual or notional) incurred on or attributable to specific article, product or activity.

2) As a verb- to ascertain the cost of a specified thing or activity.

3)  Costing is defined as “the technique and process of ascertaining cost”

4) Cost Accounting – cost accounting is defined as “ the process of accounting for cost which begins with the recording of income and expenditure or the bases on which they are calculated and ends with the preparation of periodical statements and reports for ascertaining and controlling costs.” 

5) Cost Accountancy – cost accountancy has been defined as 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. It includes the presentation of information derived there for the purpose of managerial decision making.”

6) Management Accounting – As per CIMA Official Terminology “Management accounting is the application of the principles of accounting and financial management to create, protect, preserve and increase value for the stakeholders of for-profit and not-for-profit enterprises in the public and private sectors .”

1.2 OBJECTIVES OF COST ACCOUNTING

1) Ascertainment of cost - The main objective of cost accounting is accumulation and ascertainment of cost. Costs are accumulated, assigned and ascertained for each cost object.

2) Determination of selling price and profitability – the cost accounting system helps in determination of selling price and thus profitability of a cost object through in a competitive business environment, selling prices are determined by external factors but cost accounting system provides a basis for price fixation and rate negotiation.

3) Cost control- the object is to minimise the cost of manufacturing. Comparison of actual cost with standards reveals the discrepancies i.e. variances. If the variances are adverse, the management enters into investigation so as to adopt corrective action immediately.

4) Cost reduction – cost reduction is another important objective of cost accounting. Cost reduction is the real and permenant reduction in the unit cost of goods manufactured or services rendered.

5) Assisting management in decision making – by providing relevant information, ‘Cost Accounting’ assist management in planning, implementing, measuring, controlling and evaluation of various activities.

6) Preparation of Financial Statements, Profit and Loss Account, Balance Sheet- to prepare these statements, the value of stock, work in progress, finish goods etc; are essential in the absence of the costing department, when we have to close the accounts it rather takes too much time but a good system of costing facilitates the preparation of the statements, as the figures are easily available; they can be prepared monthly or even weekly.

1.3 DIFFERENCE BETWEEN FINANCIAL ACCOUNTING AND COST ACCOUNTING

Basis	Financial Accounting	Cost Accounting
Objective	Providing information about  the financial performance of an entity	Ascertainment of cost for the purpose of cost control and decision making
Nature	It classifies records, presents and interprets transactions in monetary terms.	It classifies costs, records, presents, and interprets it in a significant manner.
Recording of data	It records historical data.	It makes use of both historical and pre-determined costs.
Users of information	The users of financial accounting statements are shareholders, creditors, financial analyst and government and its agencies etc	The cost accounting information is generally used by internal management but some time regulatory authorities also.
Time period	Financial statements are prepared usually for a year.	Reports and statements are prepared as and when required.
Presentation of information	A set format is used for presenting financial information.	In general, no set format for presenting cost information is followed.

1.4 Advantages of cost accounting

Advantages to Management

1. It helps the management to find out the exact cost of each product.

2.  Cost accounting helps to analyse the cost of each product and hence the profitable and unprofitable activities can be located.

3. Cost comparison with other industries is possible. This enables to improve the efficiency.

4. It can reveal the wastages and helps to prevent them.

5.  Idle capacity of plants can be located and utilized.

6.  Efficiency of machine which is old can be compared with the new one in the market and replacement decision can be taken.

7. It helps the management to fix the selling price correctly.

8. Standards can be set up for each item of activity to control cost.

9.  In the period of depression or in competitive market it becomes necessary to reduce the price even below the cost.  Cost accounting guides management to reduce prices.

10. It helps the management to make cost calculations for the new designs of existing product or totally a new product.

11. Quotations and tenders can be submitted by quoting the exact price.

12. It helps to conduct cost audit of costing records of a company whenever the government instructs cost audit to be conducted

Advantages to the Workers

From the cost records we can find out the efficiency of the workers. Thus the efficient workers are rewarded and the slow workers are given more incentives to come up with to a certain level of efficiency. A sound costing system therefore increases the profitability and the workers get more wages for which they do not leave the concern often, since they are satisfied with their earnings.   

Advantages to creditors

The creditors feel secured where there is a good system of costing in a concern because they can verify the credit worthiness of the concern. Thus the creditors extend credit facilities on a longer term which is beneficial to the business  

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