Cost accounting

Introduction

Meaning of Cost

The amount of expenditure attributable to specified thing or activity.

Cost is the value of economic resources used as a result of producing or doing a thing.

ICWA defines cost as measurement , in monetary terms, of the amount of resources used for the purpose of production of goods or rendering services.

How is it different form expense & loss

Expense is that portion of cost that has been consumed during the accounting period & contributed to the revenue. It is also called expired cost. E.g. depreciation Loss is that portion of cost that has been consumed during the accounting period & has not contributed to the revenue. E.g. Loss due to fire.

Meaning of cost accounting

It is the method of accounting for cost which begins with incurrence of costs & ends with control of cost. CIMA, London defines cost accounting as the process of accounting from the point at which expenditure is incurred or committed to the establishment of its ultimate relationship with cost centers & cost units. In it widest usage, it embraces the preparation of statistical data, application of cost control methods & the ascertainment of profitability of activities carried out or planned.

Meaning of cost unit & cost center

A cost unit is a unit of product, service or time in terms of which costs are ascertained or expressed. A cost centre is a location, person or item of equipment for which costs are ascertained & used for the purpose of cost control.

Meaning of cost accountancy

It is a wider term than cost accounting.

CIMA, london defines cost accountancy as
the application of costing & cost accounting principles, methods & techniques to the science , art & practice of cost control & ascertainment of profitability. It includes the presentation of information derived there from for the purpose of managerial decision making.

Thus cost accountancy includes.

costing Cost accounting Cost control Is the technique & process of ascertaining cost. It is the method of accounting for cost which begins with incurrence of costs & ends with control of cost. Involves establishing target performance, measuring actual &comparing with the target, & taking corrective actions.

Cost reduction
Cost audit

Is the achievement of real & permanent reduction in unit cost of products manufactured or services rendered.
Is the verification of cost accounts.

Objectives of cost accounting

To ascertain cost. To control cost. To provide information for decision making. To determine selling price. To ascertain costing profit.

Financial accounting & Cost accounting

Basis
Objective

FA
Provide information of the final results. Reveals results of the business as a whole.

CA

Provide information for decision making. Shows profit made on Analysis of each product, job or profit process. Voluntary & made as Mandatory As per Legal per requirements of the requirement companies act 1956 & management. income tax act 1961 Data used Based on historical data. Based on present & future data. Stocks are valued at Stocks are valued at cost Stock cost. or market price whichever valuation is lower.

Financial accounting & Cost accounting`

Basis
Responsibility fixation Access to accounts Type of information. Interested parties Emphasis

FA
Does not fix responsibility Outsiders have access. Only monetary information is recorded.

CA
Fixes responsibility Outsiders do not have access. Monetary & non monetary information is recorded.

Whole world is Only internal interested in information. management is interested. On reporting On control

Advantages of Cost accounting

Advantages to management Ascertains cost. controls cost. Helps in inventory control. Helps in cost reduction

Management accounting
Acc to ICMA London management accounting is , the application of professional knowledge &
skill in the preparation of accounting information in such a manner as to assist management in formation of policies, & in the planning & control of the operations of the undertaking.

Nature of management accounting

It helps in future planning. It is an integral part of management. It uses certain techniques for making the accounting more useful. Analyses cause & effect relationship. It is selective in nature.

Scope of management accounting

It includes: Financial accounting Cost accounting Budgeting & forecasting Reporting Inventory control Tax accounting Internal audit Performance evaluation of management.

Financial vs. management accounting

Basis
Objective

FA

MA
Provide information for decision making. Voluntary as per requirements of the management. Historical & estimates of future. Overall organisation

Provide information of the final results. Mandatory As per Legal requirement companies act 1956 & income tax act 1961 historical data. Time orientation Report entity Responsibility centers

Financial vs. management accounting

Basis
Report frequency Access to accounts Type of information. Interested parties

FA
Varies with purpose, monthly or weekly Outsiders have access. Only monetary information is recorded.

MA
quarterly & annual Outsiders do not have access. Monetary & non monetary information is recorded.

Whole world is Only internal interested in information. management is interested.

Cost accounting vs management accounting

Basis
Purpose

CA

MA

Deals with cost Provides information ascertainment, cost for managerial decision allocation & cost control. making. Narrow Standard costing, budgetary control, CVP analysis, inventory control. wider All techniques of cost accounting & Funds flow & cash flow analysis, ratio analysis.

Scope Techniques used

Cost accounting vs management accounting

Basis
Organisational status Data base

CA
Used at middle or lower levels in the organization. Information is derived from financial accounting records.

MA
Used at higher levels in the organization. Information is derived from financial accounting, cost accounting records & other sources as well..

Dependency

Cost accounting system can be installed without management accounting system.

Management accounting system cannot be installed without cost accounting system.

Objectives of management accounting

Helps in planning & formulating policies. Helps in interpretation process. Helps in decision making. Helps in motivating employees. Helps in organizing. Coordinating. Controlling performance. Reporting.

Performa for cost sheet

Cost sheet

Cost classification
Costs related to Income measurement Costs related to profit planning. Cost concepts for control. Cost concepts for decision making.

Costs related to Income measurement

Product costs & period costs.

Which can be identified with production or purchase of goods. E.g raw material, labour. Which vary with passage of time & not production. E.g rent, insurance, salary etc.

Absorbed & unabsorbed costs.

Which must be absorbed by the revenue of the period in which products are sold & not in the year in which they have been incurred.

Expired & unexpired costs.

Which cannot contribute to production of future revenues. Which can contribute to the revenue in future.

Joint product costs & separable costs.

Are common costs which are not attributable to different individual products. Can be attributable to a particular product.

Costs related to profit planning.

Fixed costs, variable costs & mixed costs.

Remains same e.g. rent , insurance , depreciation etc. Changes with output e.g raw material, labour. Partly fixed & partly variable e.g. telephone , power.

Future costs & budgeted costs.

Are expected to be incurred at some future date as a result of current decision. Estimated costs & can be planned.when a plan involving future costs is accepted & a budget is made , it becomes budgeted cost.

Cost concepts for control.

Responsibility costs
Which are identified with the person responsible for their incurrence.

Controllable & non controllable costs.

Which are influenced by the actions of manager of responsibility centre.

Direct & Indirect costs.

Which can be identified with a particular department, division or segment. which cannot be identified are indirect.

Cost concepts for decision making.

Relevant & irrelevant costs.

Which are influenced by a decision are relevant costs.

Incremental & differential costs.

Are additional costs caused by a particular decision. Arise due to difference in costs between two available , acceptable alternatives.

Out of pocket & sunk costs.

Which require current/future cash expenses. Costs which have already been incurred in the past.

Opportunity & imputed costs.

Benefits foregone for not choosing the second best alternative. Cost of self owned resources.