| Cost Accounting - Concept And Implementation |
| By : Abdul Hannan | Previous | Next |
| Posted on : 02 Jun, 2008 | Total Views : 1083 |
COST ACCOUNTING
INTTRODUCTION:
It is better to review the basics concepts, costing methods and techniques and elements of costing before we work out a costing for any project.
Cost accounting is a system of determining the costs of products or services. It has primarily developed to meet the needs of management. It provides detailed cost information to various levels of management for efficient performance of their functions.
Financial accounting provides information about profit, loss, cost etc., of the collective activities of the business as a whole on a particular date for given period only. It does not give the data regarding costs by departments, products, processes and sales territories etc. Financial accounting does not fully analyses the losses due to idle time, idle plant capacity, inefficient labor, sub-standard materials, etc. Cost accounting is not restricted to past. It is concerned with the ascertainment of past, present and expected future costs of products manufactured or services supplied. Cost accounting provides detailed cost information to various levels of management for efficient performance of their functions.
"A cost is the value of economic resources used as a result of producing or doing a task"
Cost is ascertained by cost centers or cost units or by both.
For the purpose of ascertaining cost, the whole organization is divided into small parts of sections. Each small section is treated as a cost centre of which cost is ascertained. A cost centre is defined as " a location, person, or item of equipment (or group of these) for which costs may be ascertained and used for the purpose of control. A cost accountant sets up cost centers to enable him to ascertain the costs he needs to know. A cost centre is charged with all the costs that relate to it. The purpose of ascertaining the cost of cost centre is cost control. The person in-charge of a cost centre is held responsible for the control of cost of that centre.
Cost unit breaks up the cost into smaller sub-divisions and helps in ascertaining the cost of saleable products or services. A cost unit is defined as a "unit of product, service or time in relation to which cost may be ascertained or expressed." For example in a spinning mill the cost per kg of yarn may be ascertained. Kg of yarn is cost unit. In short Cost unit is unit of measurement of cost.
METHODS OF COSTING:
Method of costing refers to the techniques and processes employed in the ascertainment of costs. The method of costing to be applied in a particular concern depends upon the type and nature of manufacturing activity. Basically there are two methods of costing
1. Job costing: Cost unit in job order costing is taken to be a job or work order for which costs are separately collected and computed.
2. Process costing: This is used in mass production industries manufacturing standardized products in continuous processes of manufacturing. Cost is accumulated for each process or department. For spinning mills, process costing is employed.
TECHNIQUES OF COSTING:
These techniques may be used for special purpose of control and policy in any business irrespective of the method of costing being used there.
Standard costing: This is the valuable technique to control the cost. In this technique, standard cost is predetermined as target of performance and actual performance is measured against the standard. The differences between standard and actual costs are analyzed to know the reasons for the difference so that corrective actions may be taken.
Marginal costing: In this technique, cost is divided into fixed and variable and the variable is of special interest and importance. This is because; marginal costing regards only variable costs as the costs of products. Fixed cost is treated as period cost and no attempt is made to allocate or apportion this cost to individual cost centers or cost units.
Cost Ascertainment is concerned with computation of actual costs. Ascertainment of actual costs reveals unprofitable activities losses and inefficiencies.
Cost Estimation is the process of predetermining costs of goods or services. The costs are determined in advance of production and precede the operations. Estimated costs are definitely the future costs and are based on the average of the past actual costs adjusted for future anticipated changes in future. Cost estimates are used in the preparation of the budgets. It helps in evaluating performance. It is used in preparing projected financial statements. Cost estimates may serve as targets in controlling the costs.
CLASSIFICATION OF COSTS:
Costs are classified into direct costs and indirect costs on the basis of their identifiably with cost units or processes or cost centers.
DIRECT COST: These are the costs which are incurred for and conveniently identified with a particular cost unit, process or equipment. For a spinning mill, costs of raw material used, packing material, freight etc are direct costs
INDIRECT COST: These are general costs and are incurred for the benefit of a number of cost units, processes or departments. These costs cannot be conveniently identified with a particular cost unit or cost centre. In a manufacturing unit, power cost, administrative wages, managerial salaries, materials used in repairs etc are indirect costs.
The terms direct and indirect should be used in relation to the object of costing. An item of cost may be direct cost in one case and the same may be indirect in the other case. It is the nature of business and the cost unit chosen that will determine whether a particular cost is direct or indirect.
FIXED AND VARIABLE COSTS; Costs behave differently when level of production rises or falls. Certain costs change in sympathy with production level while other costs remain unchanged. As such on the basis of behavior or variability, costs are classified into fixed, variable and semi-variable.
FIXEDCOSTS; these costs remain constant in "total" amount over a wide range of activity for a specified period of time. They do not increase or decrease when the volume of production changes.
VARIABLE COSTS: These costs tend to vary in direct proportion to the volume of output. In other words, when volume of output increases, total variable cost also increases and vice-versa.
ELEMENTS OF COST: A cost is composed of three elements i.e. material , labor and expense. Each of these elements may be direct or indirect.
DIRECT COST INDIRECT COST
Direct material Indirect material
Direct labor Indirect labor
Direct expenses Indirect expenses
MATERIAL COST:
DIRECT MATERIAL is that which can be conveniently identified with and allocated to cost units. Direct materials generally become a part of the finished product. For example, cotton used in a spinning mill is a direct material.
INDIRECT MATERIAL is that which can not be conveniently identified with individual cost units. In a spinning mill, engineering department spares, maintenance spares, lubricating oils, greases, ring travelers etc
LABOUR COST:
DIRECT LABOUR cost consists of wages paid to workers directly engaged in converting raw materials into finished products. These wages can be conveniently identified with a particular product, job or process.
INDIRECT LABOUR is of general character and cannot be conveniently identified with a particular cost unit. In other words, indirect labor is not directly engaged in the production operations but only to assist or help in production operations. For example in a spinning mill, the number of maintenance workers, no of workers in utility department etc
EXPENSES; All costs other than material and labor are termed as expenses.
DIRECT EXPENSES are those expenses which are specifically incurred in connection with a particular job or cost unit. Direct expenses are also known as chargeable expenses.
INDIRECT EXPENSES can not be directly identified with a particular job, process and are common to cost units and cost centers.
PRIME COST = Direct material +Direct labor + Direct expenses
OVERHEAD = Indirect material + Indirect labor + Indirect expenses
TOTAL COST = PRIME COST + OVERHEAD
ADVANTAGES OF COST ACCOUNTING:
It reveals profitable and unprofitable activities.
It helps in controlling costs with special techniques like standard costing and budgetary control
It supplies suitable cost data and other related information for managerial decision making such as introduction of a new product, replacement of machinery with an automatic plant etc
It helps in deciding the selling prices, particularly during depression period when prices may have to be fixed below cost
It helps in inventory control
It helps in the introduction of a cost reduction program and finding out new and improved ways to reduce costs
Cost audit system which is a part of cost accountancy helps in preventing manipulation and frauds and thus reliable cost can be furnished to management
ESSENTIALS OF A GOOD COST ACCOUNTING SYSTEM:
The method of costing adopted. It should be suitable to the industry
It should be tailor made according to the requirements of a business. A ready made system can not be suitable
It must be fully supported by executives of various departments and every one should participate in it
In order to derive maximum benefits from a costing system, well defined cost centers and responsibility centers should be built within the organization
controllable and uncontrollable costs of each responsibility centre should be separately shown
cost and financial accounts may be integrated in order to avoid duplication of accounts
well trained and educated staff should be employed to operate the system
It should prepare an accurate reports and promptly submit the same to appropriate level of management so that action may be taken without delay
Resources should not be wasted on collecting and compiling cost data not required. Only useful cost information should be compiled and used whenever required.
Written By : Abdul Hannan
