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The term cost accountancy is wider than the term cost accounting. According to the Terminology of Management and Financial Accountancy published by the Chartered Institute of Management Accountants, London, cost accountancy means, "the application of costing and cost accounting principles, methods and techniques to the science, art and practice of cost control. It includes the presentation of information derived therefrom for the purpose of managerial decision making." Cost accountancy is thus the science, art and practice of cost accountant. It is a science because it consists of organised or systematic knowledge, which a cost accountant must possess for proper discharge of his functions. As a matter of fact the cost accountant's knowledge should not remain restricted only to such subjects which cost accountancy embraces but it should extend to such subjects like financial management, business economics, production control, operations research which will help him in application of his cost accountancy knowledge to the problems of the business.
Cost accountancy is also the practice of a cost accountant because he has to make constant efforts in the field of cost accountancy. He has to endeavour constantly for reducing costs, present cost data in a condensed but informative way to the management so that the management may take proper action at the opportune time.
Definition of Cost Accounting
Cost accounting is the process of accounting for costs. It embraces the accounting procedures relating to recording of all income and expenditure and the preparation of periodical statements and reports with the object of ascertaining and controlling costs. It is thus the formal mechanism by means of which costs of products or services are ascertained and controlled.
Objects of Cost Accounting
Ascertaining costs- The first and foremost objective of cost accounting is to find out cost of a product, process or service. The other objective which have been mentioned hereafter can be achieved only when the costs have been ascertained.
Determining selling price- Business enterprises are run on a profit-making basis. It is thus necessary that the revenue should be greater than the costs incurred in producing goods and services from which the revenue is to be derived. Cost accounting provides information regarding the cost to make and sell such products or services. Of course, many other factors, such as the conditions of the market, the area of distribution, the quantity which can be supplied etc. are also to be given due consideration by the management before deciding upon the price but the cost plays a dominant role.
Cost control and cost reduction- Cost accounting assists in cost control. It uses techniques such as budgetary control, standard costing etc. for controlling costs. Budgets are prepared well in advance. The standards for each item of cost are determined, the actual costs are compared with the standard costs and variances are found out as to their causes. This greatly increases the operating efficiency of the enterprise. Besides it, costs are required to be reduced also. Constant research and development activities help in reduction of costs without compromising with the quality of goods or services.
Measuring and increasing efficiency- Cost accounting involves a study of the various operations used in manufacturing a product or providing a service. The study facilitates measuring of the efficiency of the organisation as a whole as well as of the departments besides devising means of increasing the efficiency.
Ascertaining Profits- Cost accounting also aims at ascertaining the profits of each and every activity. It produces statements at such intervals as the management may require. The financial statements prepared under financial accounting, generally once a year or half-year, are spaced too far apart in time to meet the needs of management. In order to operate the business at a high level of efficiency, it is essential for the management to have a frequent review of production, sales and operating results. Cost accounting provides daily, weekly or monthly volumes of units produced, accumulated costs together with appropriate analysis so that quantum of profit and profitability is known.
Provides basis for managerial decision making- These policies may relate to any of the following matters-
Determination of cost-volume-profit relationship.
Shutting down or operating at a loss.
Making or buying from outside suppliers etc.
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 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.
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."
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.
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.
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.
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.
INSTALLATION OF COSTING SYSTEM
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 Area of OperationThe 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 chwhich 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.
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.
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
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