Cost accountancy is the application of costing and cost accounting principle, method and techniques to the science, art and practice of cost control and the ascertainment of profitability. It includes the presentation of information derived there from for the purpose of managerial decision - making".
The term 'Cost Accountancy' includes Costing and Cost accounting. Its purposes are Cost-control and Profitability - ascertainment. It serves as an essential tool of the management for decision - making.
"The process of accounting for cost from the point at which expenditure is incurred or committed to the establishment of its ultimate relationship with cost centres and cost units. In its widest usage it embraces the preparation of statistical data, the application of cost control methods and the ascertainment of the profitability of activities carried out or planned" Cost accounting means such as analysis of accounting and other information as to enable management to know the cost involved in each activity together with its significant constituent elements in order to arrive at proper decisions. Cost accounting provides management with cost data relating to products, processes, jobs and different operations in order to control the costs and maximize the earnings. It play a vital role in all the business activities.
Definition of Cost Accounting
Get your grade
or your money back
using our Essay Writing Service!
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 these from for the purpose of managerial decision making.
Objects of Cost Accounting
To serve as a guide to price fixing of products.
To disclose sources to wastage in various operations of manufacture.
To reveal sources of economy in production process.
To provide for an effective system of stores and material.
To measure the degree of efficiency of the various departments or units of production.
To provide suitable means and information to the top management to control and guide the operations of the business organisation.
To exercise effective control on the costs, time and efforts of labour, machines and other factors of production.
To compare actual costs with the standard costs and analyse the causes of variation.
To provide necessary information to develop cost standards and to introduce the system of budgetary control.
It enables the management to know where to economize on costs, how to fix prices, how to maximize profit and so on.
Classification of Cost
The cost-classification is the process of grouping costs according to their characteristics. The cost can be classified into the following:
According to elements;
According to Functions or Operations;
According to Nature or Behaviour,
Accounting to Controllability,
According to Normality,
According to Relevance to decision-making and Control.
According to Elements: The cost is classified into i) Direct Cost, and ii) Indirect Cost according to elements, viz., Materials, Labour and Expenses, the description of which occurs in the earlier pages of this chapter.
According to Functions: the cost is classified into the following:
Production Cost or Manufacturing Cost,
Selling Cost, and
A brief description of each these items are given below:
Production Cost is 'The cost of sequence of operation which begins with supplying materials, labour and services and ends with primary packing of the product'.
It is also known as Manufacturing of Factory Cost.
Administration Cost is "The Cost of formulating the policy, directing the organisation and controlling the operations of an undertaking, which is not related directly to a production, selling, distribution, research or development activity or function." Administration Cost comprises office and Administration expenses.
Selling Cost is "The cost of seeking to create and stimulate demand (sometimes termed 'marketing') and of securing order."
It is also known as Selling expenses or Selling overheads which include all the expenses of Selling Department.
Distribution Cost is "The cost of sequence of operations which begins with making the packed product available for dispatch and ends with making the re-conditioned returned empty package, if any, available for re-use".
Always on Time
Marked to Standard
It is known as Distribution expenses or overheads which include expenses like packing, warehouse expenses, cost of freight, shipping charges and also the expenses of re-conditioning the returning empty packages for using them again.
According to Nature or Behaviour: Cost can be classified into
Fixed Cost ii) Variable Cost, and iii) Semi-Fixed for Semi-variable Cost.
Fixed Cost is "A cost which tends to be unaffected by variations in volume of output. Fixed costs depend mainly on the effusion of time and do not vary directly with volume of rate of output. Fixed Costs are sometimes referred to as period costs in systems of direct costing." Fixed costs or Fixed expenses are those expenses which do not change with the increase or decrease in the quantum of production but remain stable. They are period costs, e.g., Rent of Building, Salaries etc.
Variable Cost is "A cost which tends to vary directly with volume of output, Variable costs are sometimes referred to as direct costs in systems of direct costing." Variable costs or expenses are those which increase in direct proportion with the increase in production or which decrease in direct proportion with the decrease in production, e.g., Direct Materials, Direct Labour, Power, Fuel etc.
Semi-fixed or Semi-variable cost is "A cost which is partly variable." This is a cost with changes but not in direct proportion to the increase or decrease in the production-output, e.g., Repairs and Maintenance, Salary of supervisors etc.
According to controllability: The cost can be divided into:
Controllable Cost, ii) Uncontrollable Cost.
Controllable Cost: This is a cost which can be influenced by the action of a specified member of an undertaking. The organisation is divided into departments or responsibility centres each managed by a Head. The costs of a particular department or centre re guided by the person-in-charge of the department. The costs which can be controlled by a 'specified member' who is generally an important link in the management are the controllable costs. They Head of a cost-centre or a department ahs control over variable costs only which include Prime cost and other variable overheads. So the controllable costs are the variable costs.
Uncontrollable Costs: it is a cost which cannot be influenced by the action of a specified member of an undertaking. Uncontrollable costs are generally the Fixed costs, the control of which does not lie within the province of a member of the undertaking. The change in fixed costs is a mater to be decided at the top level of the management depending upon the policy of the undertaking. Another example of he uncontrollable cost is where the cost of one department is shared by the other department for reason that the other department is taking the benefit of services of the department. Suppose, the cost of Power departments is shared by the Machine Department, the cost of this share is uncontrollable as it has no control over the cost of the other department, viz., the Power Department.
According to Normality:
The cost is classified into i) Normal cost, and ii) Abnormal cost
Normal Cost: It is the cost at a given level of output in the condition at which that level of output is normally attained.
Abnormal cost: it is a cost which is beyond normal cost.
According to relevance to decision-making and Control:
The costs classified on this basis are the following
Shut-down Cost: A cost which will still be required to be incurred even though a plant is closed or shut-down for a temporary period, e.g., the cost of rent, rates, depreciation, maintenance etc., is known as shut-down cost.
Shun Cost: A cost which has been incurred in the past or sunk in the past and is not relevant to the particular decision-making is a sunk cost. If it is decided to replace the existing plant; the written down book value of the plant less the sale value of the existing plant, is a Sunk a Irrevocable cost.
Opportunity Cost: "The net selling price, rental value or transfer value which could be obtained at a point in time if a particular asset or group of assets were to be sold, hired, or put to some alternative use available to the owner at that time" is the opportunity cost. The cost which are related to the sacrifice made or the benefits foregone are opportunity costs. to take an example, if a part of the factory building has been let out on rent and now we want to use that portion for installing a plant, we would naturally lose the rent that we used to get. So the loss of rent is the opportunity which would arise due to putting the part of that factory building to an alternative use available to the owner, and this cost should be kept in view while installing the plant.
This Essay is
a Student's Work
This essay has been submitted by a student. This is not an example of the work written by our professional essay writers.Examples of our work
Imputed cost: it is hypothetical cost required to be considered to make costs comparable. If the owner of the factory charges rent of the factory to the cost of production to make cost comparable with that of those undertakings which run production in rented factories, it is an Imputed cost as the rent has actually not been paid. Some is the case with charging Interest on one's own capital.
INSTALLATION OF COSTING SYSTEM
The need and importance of the installation and the organisation of a good system of cost accounting are being increasingly realized presently all over the business versatility. The common experience of enthusiastic youths climbing the business - tree and falling mid-way without even collecting the leaves owes to the ignorance of he use installation and organisation of accosting system, and to the infatuation that the profits could be earned without it. A good system is the key-point
overning, the mechanism of an enterprise in the field of cost control, ascertainment of profitability, and managerial decision-making.
Installation of a cost system is not an expense but an investment as the rewards are much greater than the expenses incurred. The cost system is for the business and not the business for a system of cost. Therefore, the system has to be so designed as to meet the specific needs of the enterprise.
General Consideration for installing Costing System
The general considerations to be observed in installing a costing system are as follows:
The Objective: Whether the objective of installing the costing system is limited to a specific area, e.g. material management, or fixing selling price. Or to arrive at a certain managerial decision; or the object is to install the system for covering all the aspects of cost affecting the business. The approach to install the system will be dependent on its objectives.
The Area of Operation: Having decided the objective, the areas of operation of the system are to be studied, by which the management can be best benefited. If production is slack, attention will have to be paid to increase it; if production is good but the sales are receding, study will be made to increase the sales and action taken according to the results of study and analysis. Such areas which require immediate attention are to be carved out on priority basis to be handled by the cost system,
The Organisation of the Business: No system of cost installation would succeed until the organisation structure of the business is taken into account. The organizational part would help to determine the scope of working and improvement. If the interests of management call for certain minor changes in the organizational structure, to its advantage, the same may have to be done.
The Conception & Reception of the Idea: The idea of the installation of the cost system is to be placed before the staff and the workers in a manner that it is well received and not objected to on flimsy grounds. The success of the system would depend on the cooperation of he persons engaged in the enterprise, and the cooperation will be forth coming only if the idea and plans are well conceived and received. The benefits of introducing the system to all the sections should be well explained.
Collection of Data & Prompt Information: The cost data works as a base for decision-making. There should be evolved a proper system for the collection of the required cost data and information promptly. Secondly, there should be a system to verify the correctness of the data supplied, otherwise the conclusions drawn would be wrong and time spent in its working would go waste.
Cost Records & Cost Books: The maintenance of cost records and cost books depends on the size and nature of the business, but the basic requirements. The manner in which the financial accounts could be interlocked into an integral accounting system has to be studied and worked out. Decision has to be taken if two separate set of books-one for financial accounts and other for cost accounts-have to be maintained and thereafter the results are to be reconciled. Proper books and records are to be kept and maintained to meet the requirements of either of the two situations mentioned above.
Control system for the Elements of Cost: System would have to be devised for recording and controlling costs of materials, labour and overheads, in accordance with costing principles and procedures.
Type and Method of Costing: The choice of method of costing would depend on the nature of production, e.g., Job Cost method or the Process Cost method. For cost control, standard costing along with budgetary control may have to be selected and applied. Similarly, for decision making, Marginal and Differential costing techniques may be found useful. Preparations for the application of the particular method and technique/type should be made initially.
Responsibility Accounting: Responsibility accounting is a technique of cost control by delegating, etc., known as responsibility centres. Its has to be judged whether a particular official who had been assigned a particular function, has implemented the same or not within the time' allotted to him, or not, and thus the responsibility has got to be fixed for failure-action on individual persons, for the sake of control of cost. For this purpose, a system of responsibility accounting should be evolved.
Specific considerations for installing costing system
The specific considerations as distinct from general considerations to be kept in view while installing a cost system are as follows:
Size and Nature of Business: In a business of big size, a detailed cost system is necessary while in a small business, the system should be within the requirements so that the expenses on the installation and its working may not out-weigh the utility.
The cost system is good for business engaged in manufacturing or in service-rendering concerns but for others. Even in production enterprise like colliery where the production costs are all direct costs, the financial where the production costs are all direct costs, the financial accounts may be so designed as to obviate the need of any cost system, unless otherwise called for.
Products: the nature of product determines the method of costing to be applied. If the material content of the product is more valuable, the material cost records need be kept in comparatively more elaborate manner so as to make material cost control effective. Same is the position with regard to labour and overhead.
Organisation: The organizational set up for a costing system should be modelled that the control part is exercised by the Cost Accountant, as such; the present organizational set up of the costing department need close study to suggest necessary changes.
Functional study: The functional divisions of an undertaking based on cost are a) Manufacturing, b) Administration, and c) Selling & Distribution. A study of the present working of the different departments in necessary to suggest improvements.
Principles for Smooth Working
The following principles should be kept in mind while introducing the cost system:
The system should be simple and easy to operate.
The system should be flexible, so that it may be expanded or contracted per needs of the business.
The existing pattern should be disturbed only as little as may be considered desirable.
The desired changes be introduced gradually and not in haste.
Confidence be created by the Cost accountant in the minds of management and
Executives regarding the utility of the system, so as to avoid unnecessary criticism
And to obviate obstacles.
Line of Action
The following line of action is recommended for the installation of cost system.
Determination of the type of costing and the method of costing, as may be suitable for the undertaking.
To prepare forms, card, report-performs books etc., for keeping records of all the elements of cost, viz., material, labour and overheads.
To decide issues regarding material cost control, i.e., purchase, storing, issue and valuation.
To decide matters regarding labour cost control, i.e., job evaluation, merit rating, appointment, time recording, division of work, remuneration of labour and other allied problems like idle time, overtime, labour turnover, casual workings, etc.
Where the work is carried on more by machines, proper records be kept for the machines.
To suggest a suitable system for the collection, classification and analysis of all.
Types of overheads, i.e., manufacturing, administrative, and selling & distributive.
To decide the methods of allocation and apportionment of overheads among the production departments and Service departments which should be earlier clearly demarcated, and to decide the method of absorption of overheads.
To decide normal capacity of production and prepare budgets and standards.
To maintain books of cost control based on double-entry principle.
To devise information system by which the costing department may communicate to other departments and receive reports and other necessary information's promptly.
I express my sincere gratitude and thanks to MS.POOJA KALRA for his valuable and unmatched guidance and sincere efforts in trying to make us not just familiar but well equipped with the fundamentals and building stones of the research work. The efforts put up by us during the development of this project would not have been fruitful, if it were not the people around us, who encouraged us at all times. Taking this opportunity, further we would like to thank the staff and the faculty members of the institution for being there whenever we need their help.
We are also grateful to Prof. Col. Mahander Singh Director General, RDIAS for his expert guidance and cooperation in making our project learning and worthwhile experience.