A contractor is selected, normally in competition, to Design and Build the project.

Tenders are invited on the basis of an "Employer's Requirements" document prepared normally by the client or his consultants. The Employers Requirements set out the project needs in terms specification, function and performance of the building required and if applicable will also define planning and any other restrictions. The contractor responds with a set of Contractors Proposals upon which the tender bids are assessed. Assuming the Contractors Proposals fulfil the employers requirements, the lowest bid is often accepted, but this may not be the case because subjective consideration of the overall design and quality of the proposals may be important than cost alone. Once appointed the contractor employs and is therefore responsible for the design team. It should be noted that under a JCT form of Design and Build contract, the Employer, unless he/she appoints somebody else, becomes the Employers Agent. In the JCT contract this person is assumed to be non-technical and could be the only named party apart from the Contractor there is normally no quantity surveyor. In most cases the client would be advised to retain the services of his own consultants including a quantity surveyor to protect his interests and act on his behalf. In many cases nowadays and particularly where the project is of a complex nature or facing difficult town planning procedures, the client often appoints a design team to negotiate planning, prepare preliminary designs and specifications and a detailed design brief before seeking Design and Build proposals from contractors this is referred to by clients as "Develop then Design and Build, or by contractors colloquially as Design and Dump. Develop then Design and Build ensures that the client gets a design that works for him and the risk of the final design and construction works is assumed by the contractor. the contractor. In some instances and where the employer agrees or requires it, the initial design team can be novated to the contractor. Design and Build Advantages Establishes a fixed lump sum price, subject only to client's required changes Leaves responsibility with the contractor for organising and programming the design team's activities. The client is therefore not responsible for extensions of time in the event that design information is not produced on time. Variations (known as Changes) are normally pre-agreed and the client has the opportunity to instruct or otherwise, knowing the full consequences in terms of cost and time. The risk for unforeseen circumstances lies with the contractor. Gives single point responsibility. Disadvantages Provides the client with arguably a less sophisticated building in terms of design detailing than would be the case with other forms of procurement.

 Gives less control over the work in total and of the costs of any variations required. Can be difficult in certain instances to precisely define the standards and quality of design required. Depending on the risks imposed on the contractor at tender stage can result in a higher contract value than would otherwise be the case. Suitability Appropriate where the client requires a firm lump sum price and where the required standards and quality can be easily defined before tenders are sought. For more control over quality and cost, this procurement route can be used in a "Develop then Design and Build" form where the client's design team initially negotiates and obtains planning permission, prepares outline designs, specifications and a detailed brief for the Employers Requirements, particularly where more complex buildings are required under this procurement method. In some cases the employers design team is required to be novated to the contractor after obtaining planning permission.

INTRODUCTION Before consider what the changing role of Quantity Surveyor is in the future, it is worthwhile to review the background of the Quantity Surveying profession and the roles and responsibilities of Quantity Surveyor. In this chapter, the background of the Quantity Surveyor and the HKIS will be introduced first. And then, the traditional roles and evolved roles of the Quantity Surveyor will be discussed one by one. After that, responsibilities of Quantity Surveyor have some explains. What skills and knowledge are the Quantity Surveyor should be included in the past will be discussed in this chapter. Quantity Surveyor is one of important roles in the construction industry. Thus, the effects of Quantity Surveyor will be mentioned in this chapter also. Lastly, it is a summary of the history of the roles and responsibilities of the Quantity Surveyor. 2.2 BACKGROUND TO THE QUANTITY SURVEYOR Firstly, it has been stated that: Quantity surveyors are the profession developed during the 19th century from the earlier "Measurer," a specialist tradesman (often a guild member), who prepared standardized schedules for a building project in which all of the construction materials, labour activities and the like were quantified, and against which competing builders could submit priced tenders. Because the tenders were each based on the same schedule of information, they would be easily compared to find the most suitable candidate. QSBC (2009). A quantity surveyor is professionally trained, qualified and experienced in dealing with these problems on behalf of the employer. He is essentially a cost

expert whose prime task is to ensure that the project is kept within the agreed budget and that the employer obtains value for money (Seelay, 1997, p.40). Quantity Surveyors are the financial managers of the construction team who add value by managing the functions of cost, time and quality. They have been trained as construction cost consultants who have expert knowledge of costs, values, labour and material prices, finance, contractual arrangements and legal matters in the construction filed. In general, they provide services of cost management and control in building and engineering projects of any scale (Chung, 2000, p.10). HKIS (1999) also recognized the Quantity Surveyor concerned the building contractual arrangements and cost control. They can provide private developers, government departments, contractors, mining and petro-chemical companies and insurance companies some services to suit the various demands. QSBC (2009) also stated that: A Quantity Surveyor (QS) is a professional person working within the construction industry. The role of the QS is to manage and control costs within construction projects and may involve the use of a range of management procedures and technical tools to achieve this goal. The above are some of roles of the Quantity Surveyor. And then, the definition of the role of the Quantity Surveyor should be known. Refer to RICS (1983a, p.1) which stated that In the 1971 report, the role of the Quantity Surveyor was defined as ensuring that the resources of the construction industry are utilized to the best advantage of society by providing, inter alia, the financial management for projects and a cost consultancy service to the client and designer during the whole construction process. This distinctive competence of the Quantity Surveyor is a skill in measurement and valuation in the field of construction in order that such work can be described and the cost and price can be forecast analysed, planned, controlled and accounted for. 2.3 HISTORY OF HKIS According to seeley, 1997 (in Chung, 2000, pp.3-4) The development of the surveying profession in Hong Kong goes back to 1843 with the arrival of the first Surveyor General. A Hong Kong Branch of the Royal Institute of Chartered Surveyor was established in 1992. In 1984, Hong Kong Institute of Surveyors was formed to act as an independent organization but it still maintained close links with the RICS throughout. HKIS (2009) remarked the HKIS as the leading professional organization in surveying, real estate and construction in Hong Kong over the past 25 years. The history of HKIS can be founded in HKIS (2004, p.9) which recorded that It was in April 1984 that HKIS was founded...It was by 1990 that the HKIS qualifications were fully recognized by the Hong Kong Government and HKIS ranks at par with other recognized professional bodies in local affairs.

2.4 TRADITIONAL ROLES OF QUANTITY SURVEYOR Ashworth and Hogg (2007) stated that the traditional role of Quantity Surveyor is still practiced on small to medium sized projects. It can be described as a measure and value system. Quantity Surveyor should prepared using a single price method of estimating, produce bills of quantities for tendering, measure the progress payments base on the work and prepare final account on the basis of the tender documentation. The following listed the traditional role of Quantity Surveyor: Single rate approximate estimates Cost planning Procurement advice Measurement and quantification Document preparation, especially bills of quantities Cost control during construction Interim valuations and payments Financial statements Final account preparation and agreement Settlement of contractual claims The traditional role of the quantity surveyorhas since been considerably expanded to include such functions as resources control, accountancy, legal judgment, and all within the fields of contracting, engineering, project management, etc. (Newton, 1985, p.18). As a tradition, estimating, preparation of tender documents, tender analysis, contract documentation, valuation and variation, and all quantity surveying related works of infrastructure projects are always handled by civil engineers notwithstanding that majority of these works are actually handled by quantity surveyors under the supervision of civil engineers. In the building works, the traditional role of handling these works by architects had been changed to become the role of quantity surveyors, and the Government and Private Forms of Building Contract were changed to recognize such QS role. However, in the infrastructure works, such QS role is still with the civil engineers as stated in the Government Form of Civil Engineering Works (HKIS, 2008). 2.5 EVOLVED ROLES OF QUANTITY SURVEYOR RICS (1983a) also pointed out that the Quantity Surveyors expertise had been further developed after 1971. For the construction project, they are involved in the field of manpower planning, resources control and in assessing the effects of time. The filed of contracting, civil and industrial engineering construction, mechanical and electrical engineering services, and project management and control also relate to the Quantity Surveyor. That means the role of the Quantity Surveyor is extended in 1980s. The Quantity Surveyor involve complex resource procurement and management processes, besides deal with complex

construction contracts; provides the basis for a disciplined and well managed approach to projects. In 1980s, Quantity Surveyors roles from the historically dealt with work through prime cost and provisional sums to advice procurement method which becomes a new potential role of Quantity Surveyors because of the increasing array of options that were available. Other evolved roles have included project and construction management and facilities management. It is because the inherent adversarial nature of the construction industry which are involved in contractual disputes and ligation. More engineering services orientated increased emphasis on the services such as measurement, costs and value is other reason of this change (Ashworth and Hogg, 2007). Quantity Surveyors should more direct and more related to client. This management role is most effective when linked to authority, responsibility and risk taking. Clients need early and accurate cost advice, more often than not well in advance of site acquisition and of a commitment to build (RICS, 1991). Seeley (1997) pointed out the Quantity Surveyor not only regarded building contract and often as project manager on civil and heavy engineering contracts to control the project from inception to completion and coordinate with other parties to take over the works. Quantity Surveyor is an important member of the design team in both the public and private sectors to advising employers and architects on the probable costs of alternative designs. RICS (1983a) believed that Quantity Surveyor after gained the knowledge and experience in construction economics, management and resource control, he will evolve his role. These roles are policy making, numerate skills, strategic planning, contracting, work in construction management, multi-disciplinary working, diversity in procurement, life cycle costing and building procurement adviser. Newton (1985) raised Quantity Surveyor use the expert system of computer technology can make him become identity, independence and in first. That means the role of Quantity Surveyor can be established early in the design or construction process. As a consultant Chartered Quantity Surveyor, he should improve the quality of service and the matching of the known resources to suit for the requirement of clients. There are some services should be provided to clients during precontract stage and post-contract stage. In the pre-contract stage, Quantity Surveyor should preparing bills of quantities and examining tenders received and reporting thereon, cost planning, air conditioning, heating, ventilating and electrical services, negotiating tenders and pricing bills of quantities. In the postcontract, Quantity Surveyor should taking particulars and reporting valuation for interim certificate for payments on account to the contractor, preparing periodic assessments of anticipated final cost and reporting thereon, measuring and

making up bills of variations including pricing and agreeing totals with contractor and adjusting fluctuations in the cost of labour and materials if required by the contract, air conditioning, heating, ventilating and electrical services, valuations for interim certificates, preparing accounts of variation upon contracts and cost monitoring services such as providing approximate estimates of final cost at the following frequency (RICS, 1983b). Some evolved roles stated in Ashworth and Hogg (2007) are listed as following: Investment appraisal Advice on cost limits and budgets Whole life costing Value management Risk analysis Insolvency services Cost engineering services Subcontract administration Environmental services measurement and costing Technical auditing Planning and supervision Valuation for insurance purposes Project management Facilities management Administering maintenance programmes Advice on contractual disputes Planning supervisor Employers agent 2.6 RESPONSIBILITIES OF QUANTITY SURVEYOR In the past, the responsibilities of Quantity Surveyors are mentioned in RICS (1980) which listed some responsibilities of Quantity Surveyors as following: Budget estimating; Cost planning; Advice on tendering procedures and contract arrangements; Preparing tendering documents for main contract and specialist subcontractor; Examining tenders received and reporting thereon or negotiating tenders; Pricing with a selected contractor and/or sub-contractors; Preparing recommendations for interim payments on account to the contractor; Preparing periodic assessments of anticipated final cost and reporting thereon; Measuring work and adjusting variations in accordance with the terms of the contract; Preparing final account, pricing same and agreeing totals with the contractor;

Providing a reasonable number of copies of bills of quantities and other documents. Bennett (1986, p.31) said that The quantity surveyors responsibility is to ensure that the budget is complete and that no necessary costs are omitted or duplicated.Beyond this, the quantity surveyor should advise the client to make separate provision for all other costs including consultants fees, land costs, finance costs, fluctuations where appropriate and an overall project contingency. The quantity surveyors further major responsibility is to ensure that the cost control and accounting procedures adopted by the construction manager are satisfactory. This is a normal responsibility for final accounts and raises no new issues for quantity surveyors apart from the unusually large number of separate works contract accounts to be dealt with. Chartered Quantity Surveyor will provide a construction management service because of market-orientated. Some of them are towards realizing this potential (Bennett, 1986). RICS (1991) reported that something is changing of the world in 1990s such as markets, construction industry, client needs and the profession. For the changes in markets, the trend of different sectors will have different workloads and the challenges are arising for the European Union. For the changes in the construction industry, the nature of contracting will be changing. Some competition may come from non-construction professionals. For the changes in client needs, they want get the long-terms view about the initial design and construction phase. For the changes in the profession, employment patterns, the impact of fee competition, the ways in which the quantity surveyor is appointed and the changes in their role and practice. Thus, management to time, cost and quality should be emphasized by Quantity Surveying. Bills of Quantities were still important. The areas of early cost advice, cost control and market forecasting are new services for clients business. The professions unique skill-base which combines procurement and cost management would be practiced by Quantity Surveyors. Quantity Surveyors are employed in consultancies only in the past. More and more Quantity Surveyors will be employed by clients, developers and contractor. HKIS and RICS (1994) recognized Quantity Surveyor should providing advice on tendering procedures and contractual arrangements, preparing bills of quantities and examining tenders received and reporting thereon in pre-contract stage. Also, Quantity Surveyor should do pre-contract Estimating, cost study services, pricing Bill of Quantities and post-contract cost management services such as valuations for certificates and calculating fluctuations in the cost of construction. Preliminary cost advice and cost planning, Preparation of contract documentation, tender invitation and scrutiny, negotiations with contractors, valuation of work in progress, pricing of variations, settlement of claims, cost control of project, preparation of final account and measurement for and

preparation of bills of quantities are included in the principal activities of the quantity surveyor (Seeley, 1997). RICS (1999) pointed out some services of Quantity Surveyor should be provided during different stage of the project. In the pre-contract stage, Quantity Surveyor should prepare and develop preliminary cost plan, advise on cost of design teams proposals, monitor cost implications during detailed design stage, maintain and develop cost plan. For the tender stage, Quantity Surveyor should advise on the contractual documentation to clients. Moreover, Quantity Surveyor also needs to prepare recommendations for interim payments, post-contract cost control and final account. Furthermore, Quantity Surveyor should provide and price bills of quantities, prepare cost analysis, advise on financial implications, advise on use of areas and provide measurement of areas, provide advice on contractual matters. 2.7 SKILLS AND KNOWLEDGE OF QUANTITY SURVEYOR IN THE PAST Here, some skills and knowledge of Quantity Surveyor would be introduced. RICS (1983a, pp.1-2) listed a lot of skills and knowledge of a Quantity Surveyor should have as following: Planning, estimating and controlling costs, evaluating alternative designs, undertaking feasibility studies, Measuring and describing construction work, Analyzing complex projects into manageable work packages, Producing contract documents, especially bills of quantities, Advising on appropriate methods of procurement; selecting, organizing and evaluating tender bids and contractual arrangements, Valuing work in progress, and exercising cost control during construction, undertaking the valuing of variations and potential variations, Preparing valuations for insurance purposes and advising on insurance claims, Sub-contract administration, Settlement of final accounts, Advice and settlement of contractual disputes and claims, Use of computer technology and developing computer aided design techniques, Advising on taxation, grant and financial matters and forecasting expenditure flows, Advising on cost-limits and preparing budgets, Advising on cash flow forecasting, Advising on life-cycle costs, Cost-analysis, Cost benefit analysis, Scheduling resources, Planning and programming design and construction work, use of network analysis techniques, project and construction management, Preparing and administering maintenance programmes.

Besides the above skills and knowledge, Quantity Surveyor in 1980s should expand their skills and knowledge such as construction economics, design and construction management technology, resource control, mathematical modeling, policy decisions, strategic planning, risk analysis, network analysis, other programming techniques, and to suit for the changing of working environment and economics (RICS 1983a). Newton (1985) observed the expert system of computer technology can be one of powerful skills of Quantity Surveyor for them to adapt the future. Construction management techniques includes good understanding of design and construction technology, management of time and cost, value engineering, quality management and site safety. Management of cost is one of the important to clients, and Quantity Surveyor can advice in establishing budgets and cost control. Thus, Quantity Surveyor can develop construction management to increase the competitive power (Bennett, 1986). Brandon (1990) pointed out some techniques of Quantity Surveyor should have as following: Development and appraisal--the front end decision to invest Value management--optimisation of the benefit/cost relationship Estimating and bidding methods--cost prediction and reliability Risk analysis--coping with risk and uncertainty Life cycle costing--the longer term view of the cost of the asset Expert systems--qualitative reasoning to support expert decision making Computer aided design--relating the design database to the QS function Integrated databases--designing the database for efficient and reliable information retrieval Procurement systems--assessing the contractual relationship/ arrangement between parties RICS (1991) believed that Quantity Surveyors would need to be more innovative, more pro-active and more mobile to adapt the changing client requirements. Technique of cost planning, knowledge of contractual methods and tendering should be implemented by Quantity Surveyor (Seeley, 1997). Ashworth and Hogg (2007) pointed out that design cost planning, whole life costing, value management, risk analysis and management became tools to add value for the client. It is because these tools were effective to increase importance and emphasis to meet the clients objectives. 2.8 EFFECTS OF QUANTITY SURVEYORS IN CONSTRUCTION INDUSTRY Quantity Surveyor acts an important role in the construction industry. They have many effects to the construction industry as following introduction.

The Quantity Surveyor makes the construction industry become more successful by using their skills, knowledge and expertise (RICS, 1983a). Independent cost advice on the project should provided to clients by Quantity Surveyor (RICS, 1983b). Bennett (1986, p.31) said that The quantity surveyors responsibility is to ensure that the budget is complete and that no necessary costs are omitted or duplicated.Beyond this, the quantity surveyor should advise the client to make separate provision for all other costs including consultants fees, land costs, finance costs, fluctuations where appropriate and an overall project contingency. The quantity surveyors further major responsibility is to ensure that the cost control and accounting procedures adopted by the construction manager are satisfactory. This is a normal responsibility for final accounts and raises no new issues for quantity surveyors apart from the unusually large number of separate works contract accounts to be dealt with. RICS (1992b) noted that Quantity Surveyor could setting a realistic cost budget, advise on cost implications of design and standards of construction and/or of alternative solutions and advise on the method of contractor procurement best suited to the project. Quantity surveyor is essentially a cost expert to ensure the project is kept within the agreed budget and the employer obtains value for money. The Quantity Surveyor can keep the total expenditure within the employers budget and remains compatible with the cost plan by frequently estimate of cost. Independent Quantity Surveyor could prepare an accurate bill of quantities because he would measure and value any variations that might occur during the progress of the works. Realistic budget and financial could be prepared by the Quantity Surveyor. The Quantity Surveyor can make everyone work in construction more efficient. It is benefits for the Quantity Surveyors when they negotiate a contract because they can learn more about the practical organization and management of contracts. And then produce bill of quantities more quickly. Environmental issues would be informed by surveyors to their clients to ensure that it is considered in the decision making process (Seelay, 1997). Seelay (1997, pp.415-416) also pointed out that he can, for instance, be involved in the placing of subcontract orders for both nominated and domestic subcontractors. It is essential that the contractors quantity surveyor ensures that the correct contractual conditions and financial details are embodied in the orders and subcontract arrangementssurveyor is required to report to management, usually monthly, on the overall financial state of the contract, giving comparisons of actual cost with the corresponding internal value for the various cost codes and subtradesproviding contracts personnel with the opportunity to consider remedial actionpreventing a recurrence of similar problems on future contractscontractors quantity surveyor can advise

contracts staff on significant aspects of the contract conditions, in their dealings with the architectcontractors surveyor advising design staff on the most economical form of construction and cost planning and monitoring the development as a whole. RICS (1999) noted that Quantity Surveyor could set a realistic budget and advice the procurement method best suited to the requirements of the Client. Ashworth and Hogg (2007) believed that Quantity Surveyor use his knowledge of cost planning can avoid tenders being received that were over budget. Quantity Surveyor would look after the financial interests of the contractor. Under the terms of the contract, Quantity Surveyor could submitted claims for extra payments in civil engineering project and building project to help contractor to earn more profit. 2.9 CHAPTER SUMMARY According the above discussion, Quantity Surveyor has a skill in measurement and valuation in the field of construction in order that such work can be described and the cost and price can be forecast analysed, planned, controlled and accounted for. Most of their traditional roles are related to the cost, and most of their evolved roles are related to management and the cost. That means the roles of Quantity Surveyor would not leave the link to the cost and it would develop to the direction of management. RICS (1983a, pp.8-12) believes that Quantity Surveyor after gained the knowledge and experience in construction economics, management and resource control, he will evolve his role. These roles are policy making, numerate skills, strategic planning, contracting, work in construction management, multidisciplinary working, diversity in procurement, life cycle costing and building procurement adviser. Encourage Quantity Surveyors use more new technology can get more benefit and experience. Additional and more specialist courses should be provide a education and training to people who want to become a professional Quantity Surveyor. Make more occupy in different company to Quantity Surveyor for their practice. Individual Quantity Surveyors, profession, the institution, in education and training, all parties should know their role to develop the field of Quantity Surveyor (RICS, 1983a). (RICS, 1983a) summarized the changing scene in client requirement, economic and political. There is decline in new building and engineering work and an increase in repair, maintenance, energy conservation and rehabilitation work. Changing technology will affect the construction industrys ability to design, erect and internally re-plan buildings more efficiently and economically. In the private sector, returns are low, Clients are becoming more critical and demanding in terms of both time-scale and cost for money and the profession

must react accordingly. More Quantity Surveyors are being employed in resource and manpower planning, construction and project management and allied areas. Quantity Surveyor act as project and construction managers to perform wider management and co-ordination functions. They are employed by contractors, sub-contractors, building owners, property developers and others with a major input in management, resource planning and manpower control. Quantity Surveyor should develop their skills and knowledge because it is one of the methods of selecting a Quantity Surveyor by clients (RICS 1992b; RICS1999). Thus, the Quantity Surveyor should develop their skills and knowledge to get more experience in different fields and increase their power to keep the competitive.

Lesson-12 Basic Cost Concepts Learning Objectives

To understand the meaning of different costing terms

To understand different costing methods

To have a basic idea of different costing techniques

To understand the meaning of cost sheet In order to determine and take a dispassionate view about what lies beneath the surface of accounting figures, a financial analyst has to make use of different management accounting techniques. Cost techniques have a precedence over the other techniques since accounting treatment of cost is often both complex and financially significant. For example, if a firm proposes to increase its output by 10%, is it reasonable to expect total cost to increase by less than 10%, exactly 10% or more than 10%? Such questions are concerned with the cost behavior, i.e. the way costs change with the levels of activity. The answers to these questions are very much pertinent for a management accountant or a financial analyst since they are basic for a firms projections and profits which ultimately become the basis of all financial decisions. It is, therefore, necessary for a financial analyst to have a reasonably good working knowledge about the basic cost concepts and patterns of cost behavior. All these come within the ambit of cost accounting.
Meaning of Cost Accounting

Previously, cost accounting was merely considered to be a technique for the ascertainment of costs of products or services on the basis of historical data. In course of time, due to competitive nature of the market, it was realized that ascertaining of cost is not so important as controlling costs. Hence, cost accounting started to be considered more as a technique for cost control as compared to cost ascertainment. Due to the technological developments in all fields, cost reduction has also come within the ambit of cost accounting. Cost accounting is, thus, concerned with recording, classifying and summarizing costs for determination of costs of products or services, planning, controlling and reducing such costs and furnishing of information to management for decision making.

According to Charles T. Horngren, cost accounting is a quantitative method that accumulates, classifies, summarizes and interprets information for the following three major purposes:

Operational planning and control

Special decisions

Product decisions According to the Chartered Institute of Management Accountants, London, cost accounting is the process of accounting for costs from the point at which its expenditure is incurred or committed to the establishment of the ultimate relationship with cost units. In its widest sense, it embraces the preparation of statistical data, the application of cost control methods and the ascertainment of the profitability of the activities carried out or planned. Cost accounting, thus, provides various information to management for all sorts of decisions. It serves multiple purposes on account of which it is generally indistinguishable from management accounting or so-called internal accounting. Wilmot has summarized the nature of cost accounting as the analyzing, recording, standardizing, forecasting, comparing, reporting and recommending and the role of a cost accountant as a historian, news agent and prophet. As a historian, he should be meticulously accurate and sedulously impartial. As a news agent, he should be up to date, selective and pithy. As a prophet, he should combine knowledge and experience with foresight and courage.
Objectives of Cost Accounting

The main objectives of cost accounting can be summarized as follows: 1. Determining Selling Price Business enterprises run on a profit-making basis. It is, thus, necessary that revenue should be greater than expenditure incurred in producing goods and services from which the revenue is to be derived. Cost accounting provides various information regarding the cost to make and sell such products or services. Of course, many other factors such as the condition of market, the area of distribution, the quantity which can be supplied etc. are also given due consideration by management before deciding upon the price but the cost plays a dominating role.
2. Determining and Controlling Efficiency

Cost accounting involves a study of various operations used in manufacturing a product or providing a service. The study facilitates measuring the efficiency of an organization as a whole or department-wise as well as devising means of increasing efficiency. Cost accounting also uses a number of methods, e.g., budgetary control, standard costing etc. for controlling costs. Each item viz. materials, labor and expenses is budgeted at the commencement of a period and actual expenses incurred are compared with budget. This greatly increases the operating efficiency of an enterprise.
3. Facilitating Preparation of Financial and Other Statements

The third objective of cost accounting is to produce statements whenever is required by management. The financial statements are prepared under financial accounting generally once a year or half-year and are spaced too far with respect to time to meet the needs of management. In order to operate a business at a

high level of efficiency, it is essential for management to have a frequent review of production, sales and operating results. Cost accounting provides daily, weekly or monthly volumes of units produced and accumulated costs with appropriate analysis. A developed cost accounting system provides immediate information regarding stock of raw materials, work-in-progress and finished goods. This helps in speedy preparation of financial statements.
4. Providing Basis for Operating Policy

Cost accounting helps management to formulate operating policies. These policies may relate to any of the following matters:

Determination of a cost-volume-profit relationship

Shutting down or operating at a loss

Making for or buying from outside suppliers

Continuing with the existing plant and machinery or replacing them by improved and economic ones Concept of Cost Cost accounting is concerned with cost and therefore is necessary to understand the meaning of term cost in a proper perspective. In general, cost means the amount of expenditure (actual or notional) incurred on, or attributable to a given thing. However, the term cost cannot be exactly defined. Its interpretation depends upon the following factors:

The nature of business or industry

The context in which it is used In a business where selling and distribution expenses are quite nominal the cost of an article may be calculated without considering the selling and distribution overheads. At the same time, in a business where the nature of a product requires heavy selling and distribution expenses, the calculation of cost without taking into account the selling and distribution expenses may prove very costly to a business. The cost may be factory cost, office cost, cost of sales and even an item of expense. For example, prime cost includes expenditure on direct materials, direct labor and direct expenses. Money spent on materials is termed as cost of materials just like money spent on labor is called cost of labor and so on. Thus, the use of term cost without understanding the circumstances can be misleading. Different costs are found for different purposes. The work-in-progress is valued at factory cost while stock of finished goods is valued at office cost. Numerous other examples can be given to show that the term cost does not mean the same thing under all circumstances and for all purposes. Many items of cost of production are handled in an optional manner which may give different costs for the same product or job without going against the accepted principles of cost accounting. Depreciation is one of such items. Its amount varies in accordance with the method of depreciation being used. However, endeavor should be, as far as possible, to obtain an accurate cost of a product or service.
Elements of Cost

Following are the three broad elements of cost (refer to figure 12.1): 1. Material The substance from which a product is made is known as material. It may be in a raw or a manufactured state. It can be direct as well as indirect. a. Direct Material

The material which becomes an integral part of a finished product and which can be conveniently assigned to specific physical unit is termed as direct material. Following are some of the examples of direct material:

All material or components specifically purchased, produced or requisitioned from stores

Primary packing material (e.g., carton, wrapping, cardboard, boxes etc.)

Purchased or partly produced components Direct material is also described as process material, prime cost material, production material, stores material, constructional material etc. b. Indirect Material The material which is used for purposes ancillary to the business and which cannot be conveniently assigned to specific physical units is termed as indirect material. Consumable stores, oil and waste, printing and stationery material etc. are some of the examples of indirect material. Indirect material may be used in the factory, office or the selling and distribution divisions. 2. Labor For conversion of materials into finished goods, human effort is needed and such human effort is called labor. Labor can be direct as well as indirect. a. Direct Labor The labor which actively and directly takes part in the production of a particular commodity is called direct labor. Direct labor costs are, therefore, specifically and conveniently traceable to specific products. Direct labor can also be described as process labor, productive labor, operating labor, etc. b. Indirect Labor The labor employed for the purpose of carrying out tasks incidental to goods produced or services provided, is indirect labor. Such labor does not alter the construction, composition or condition of the product. It cannot be practically traced to specific units of output. Wages of storekeepers, foremen, timekeepers, directors fees, salaries of salesmen etc, are examples of indirect labor costs. Indirect labor may relate to the factory, the office or the selling and distribution divisions. 3. Expenses Expenses may be direct or indirect. a. Direct Expenses These are the expenses that can be directly, conveniently and wholly allocated to specific cost centers or cost units. Examples of such expenses are as follows:

Hire of some special machinery required for a particular contract

Cost of defective work incurred in connection with a particular job or contract etc. Direct expenses are sometimes also described as chargeable expenses. b. Indirect Expenses These are the expenses that cannot be directly, conveniently and wholly allocated to cost centers or cost units. Examples of such expenses are rent, lighting, insurance charges etc.

4. Overhead

The term overhead includes indirect material, indirect labor and indirect expenses. Thus, all indirect costs are overheads. A manufacturing organization can broadly be divided into the following three divisions:

Factory or works, where production is done

Office and administration, where routine as well as policy matters are decided

Selling and distribution, where products are sold and finally dispatched to customers Overheads may be incurred in a factory or office or selling and distribution divisions. Thus, overheads may be of three types: a. Factory Overheads They include the following things:

Indirect material used in a factory such as lubricants, oil, consumable stores etc.

Indirect labor such as gatekeeper, timekeeper, works managers salary etc.

Indirect expenses such as factory rent, factory insurance, factory lighting etc. b. Office and Administration Overheads They include the following things:

Indirect materials used in an office such as printing and stationery material, brooms and dusters etc.

Cost allocation and cost apportionment are the two procedures which describe the identification and allotment of costs to cost centers or cost units. Cost allocation refers to the allotment of all the items of cost to cost centers or cost units whereas cost apportionment refers to the allotment of proportions of items of cost to cost centers or cost units Thus, the former involves the process of charging direct expenditure to cost centers or cost units whereas the latter involves the process of charging indirect expenditure to cost centers or cost units. For example, the cost of labor engaged in a service department can be charged wholly and directly but the canteen expenses of the factory cannot be charged directly and wholly. Its proportionate share will have to be found out. Charging of costs in the former case will be termed as allocation of costs whereas in the latter, it will be termed as apportionment of costs.
Cost Reduction and Cost Control

Cost reduction and cost control are two different concepts. Cost control is achieving the cost target as its objective whereas cost reduction is directed to explore the possibilities of improving the targets. Thus, cost control ends when targets are achieved whereas cost reduction has no visible end. It is a continuous process. The difference between the two can be summarized as follows: (i) Cost control aims at maintaining the costs in accordance with established standards whereas cost reduction is concerned with reducing costs. It changes all standards and endeavors to improve them continuously. (ii)

Cost control seeks to attain the lowest possible cost under existing conditions whereas cost reduction does not recognize any condition as permanent since a change will result in lowering the cost. (iii) In case of cost control, emphasis is on past and present. In case of cost reduction, emphasis is on the present and future. (iv) Cost control is a preventive function whereas cost reduction is a correlative function. It operates even when an efficient cost control system exists. Installation of Costing System The installation of a costing system requires careful consideration of the following two interrelated aspects:

Overcoming the practical difficulties while introducing a system

Main considerations that should govern the installation of such a system Practical Difficulties The important difficulties in the installation of a costing system and the suggestions to overcome them are as follows: a. Lack of Support from Top Management Often, the costing system is introduced at the behest of the managing director or some other director without taking into confidence other members of the top management team. This results in opposition from various managers as they consider it interference as well as an uncalled check of their activities. They, therefore, resist the additional work involved in the cost accounting system. This difficulty can be overcome by taking the top management into confidence before installing the system. A sense of cost consciousness has to be instilled in their minds. b. Resistance from the Staff The existing financial accounting staff may offer resistance to the system because of a feeling of their being declared redundant under the new system. This fear can be overcome by explaining the staff that the costing system would not replace but strengthen the existing system. It will open new areas for development which will prove beneficial to them.
c. Non-Cooperation at Other Levels

The foreman and other supervisory staff may resent the additional paper work and may not cooperate in providing the basic data which is essential for the success of the system. This needs re-orientation and education of employees. They have to be told of the advantages that will accrue to them and to the organization as a whole on account of efficient working of the system.
d. Shortage of Trained Staff

Costing is a specialized job in itself. In the beginning, a qualified staff may not be available. However, this difficulty can be overcome by giving the existing staff requisite training and recruiting additional staff if required.
e. Heavy Costs

The costing system will involve heavy costs unless it has been suitably designed to meet specific requirements. Unnecessary sophistication and formalities should be avoided. The costing office should serve as a useful service department.
Main Considerations

In view of the above difficulties and suggestions, following should be the main considerations while introducing a costing system in a manufacturing organization: 1. Product The nature of a product determines to a great extent the type of costing system to be adopted. A product requiring high value of material content requires an elaborate system of materials control. Similarly, a product requiring high value of labor content requires an efficient time keeping and wage systems. The same is true in case of overheads. 2. Organization The existing organization structure should be distributed as little as possible. It becomes, therefore, necessary to ascertain the size and type of organization before introducing the costing system. The scope of authority of each executive, the sources from which a cost accountant has to derive information and reports to be submitted at various managerial levels should be carefully gone through.
3. Objective

The objectives and information which management wants to achieve and acquire should also be taken care of. For example, if a concern wants to expand its operations, the system of costing should be designed in a way so as to give maximum attention to production aspect. On the other hand, if a concern were not in a position to sell its products, the selling aspect would require greater attention.
4. Technical Details

The system should be introduced after a detailed study of the technical aspects of the business. Efforts should be made to secure the sympathetic assistance and support of the principal members of the supervisory staff and workmen.
5. Informative and Simple

The system should be informative and simple. In this connection, the following points may be noted: (i) It should be capable of furnishing the fullest information required regularly and systematically, so that continuous study or check-up of the progress of business is possible. (ii) Standard printed forms can be used so as to make the information detailed, clear and intelligible. Overelaboration which will only complicate matters should be avoided. (iii) Full information about departmental outputs, processes and operations should be clearly presented and every item of expenditure should be properly classified.

(iv) Data, complete and reliable in all respects should be provided in a lucid form so that the measurement of the variations between actual and standard costs is possible.

9. Departmental Costing

The ascertainment of the cost of output of each department separately is the objective of departmental costing. In case where a factory is divided into a number of departments, this method is adopted.
10. Multiple Costing (Composite Costing)

Under this system, the costs of different sections of production are combined after finding out the cost of each and every part manufactured. The system of ascertaining cost in this way is applicable where a product comprises many assailable parts, e.g., motorcars, engines or machine tools, typewriters, radios, cycles etc. As various components differ from each other in a variety of ways such as price, materials used and manufacturing processes, a separate method of costing is employed in respect of each component. The type of costing where more than one method of costing is employed is called multiple costing. It is to be noted that basically there are only two methods of costing viz. job costing and process costing. Job costing is employed in cases where expenses are traceable to specific jobs or orders, e.g., house building, ship building etc. In case where it is impossible to trace the prime cost of the items for a particular order because of the reason that their identity gets lost while manufacturing operations, process costing is used. For example, in a refinery where several tons of oil is being produced at the same time, the prime cost of a specific order of 10 tons cannot be traced. The cost can be found out only by finding out the cost per ton of total oil produced and then multiplying it by ten. It may, therefore, be concluded that the methods of batch contract and cost plus costing are only the variants of job costing whereas the methods of unit, operation and operating costing are the variants of process costing.
Techniques of Costing

Besides the above methods of costing, following are the types of costing techniques which are used by management only for controlling costs and making some important managerial decisions. As a matter of fact, they are not independent methods of cost finding such as job or process costing but are basically costing techniques which can be used as an advantage with any of the methods discussed above.
1. Marginal Costing

Marginal costing is a technique of costing in which allocation of expenditure to production is restricted to those expenses which arise as a result of production, e.g., materials, labor, direct expenses and variable overheads. Fixed overheads are excluded in cases where production varies because it may give misleading results. The technique is useful in manufacturing industries with varying levels of output.
2. Direct Costing

The practice of charging all direct costs to operations, processes or products and leaving all indirect costs to be written off against profits in the period in which they arise is termed as direct costing. The technique differs from marginal costing because some fixed costs can be considered as direct costs in appropriate circumstances.
3. Absorption or Full Costing

The practice of charging all costs both variable and fixed to operations, products or processes is termed as absorption costing. 4. Uniform Costing A technique where standardized principles and methods of cost accounting are employed by a number of different companies and firms is termed as uniform costing. Standardization may extend to the methods of costing, accounting classification including codes, methods of defining costs and charging depreciation, methods of allocating or apportioning overheads to cost centers or cost units. The system, thus, facilitates inter- firm comparisons, establishment of realistic pricing policies, etc.
Systems of Costing

It has already been stated that there are two main methods used to determine costs. These are:

Job cost method

Process cost method It is possible to ascertain the costs under each of the above methods by two different ways:

Historical costing

Standard costing Historical Costing Historical costing can be of the following two types in nature:

Post costing

Continuous costing Post Costing Post costing means ascertainment of cost after the production is completed. This is done by analyzing the financial accounts at the end of a period in such a way so as to disclose the cost of the units which have been produced. For instance, if the cost of product A is to be calculated on this basis, one will have to wait till the materials are actually purchased and used, labor actually paid and overhead expenditure actually incurred. This system is used only for ascertaining the costs but not useful for exercising any control over costs, as one comes to know of things after they had taken place. It can serve as guidance for future production only when conditions in future continue to be the same. Continuous Costing

In case of this method, cost is ascertained as soon as a job is completed or even when a job is in progress. This is done usually before a job is over or product is made. In the process, actual expenditure on materials and wages and share of overheads are also estimated. Hence, the figure of cost ascertained in this case is not exact. But it has an advantage of providing cost information to the management promptly, thereby enabling it to take necessary corrective action on time. However, it neither provides any standard for judging current efficiency nor does it disclose what the cost of a job ought to have been.
Standard Costing

Standard costing is a system under which the cost of a product is determined in advance on certain predetermined standards. With reference to the example given in post costing, the cost of product A can be calculated in advance if one is in a position to estimate in advance the material labor and overheads that should be incurred over the product. All this requires an efficient system of cost accounting. However, this system will not be useful if a vigorous system of controlling costs and standard costs are not in force. Standard costing is becoming more and more popular nowadays.
Summary

1. Cost accounting is a quantitative method that accumulates, classifies, summarizes and interprets information for operational planning and control, special decisions and product decisions. 2. Cost may be classified into different categories depending upon the purpose of classification viz. fixed cost, variable cost and semi variable cost. 3. Costing can be defined as the technique and process of ascertaining costs.