Cost Concept – CMA Intermediate

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Define the term “Cost”. Compare it with value and price.

Meaning of cost:-

  • Cost refers to the expenditure incurred in producing a product or in rendering a service.
  • It is expressed from the producer or manufacturer’s viewpoint. (Not that of consumer/end user.)
  • Cost ascertainment is based on uniform principles and techniques. Hence cost is objectively.

Define the terms costing? Cost Accounting and cost Accountancy

 

  1. Costing: – The technique and process of ascertaining costs.
  2. Cost Accounting: – The process of accounting for cost which begins with recording of income and expenditure or the bases on which they are calculated and ends with the preparation of periodical statements and reports for ascertain and controlling costs
  3. Cost Accountancy: – 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 there from for the purpose of managerial decision-making.

 

 

  • List the objectives of Cost Accounting.

 

The primary objective of study of cost is to contribute to profitability through Cost Reduction and Cost Control. The following objective of Cost Accounting can be identified:-

  • (1) Ascertainment of cost: – This involves collection of cost information, by recording them under suitable heads of accounts and reporting such information on a periodical basis.
  • (2) Determination of selling price: – Selling price is influenced by a number of factors. However, prices cannot be fixed below cost, save in exceptional circumstances. Hence cost accounting is required for determination of proper selling price.
  • (3) Cost control and Cost Reduction: – In the long run, higher profits can be achieved only through Cost Reduction and Cost Control. These terms are discussed in detail in a separate Chapter.
  • (4) Ascertaining the profit of each activity: – Profit on each department/ activity/ product can be determined by comparing its revenue with appropriate cost. Hence Cost Accounting ensures profit measurement on an objective basis.
  • (5) Assisting management in decision-making:- Business decisions are taken after conducting Cost –Benefit Analysis. Hence Cost and benefits of each option are analyzed and the Manager chooses the least cost option. Thus Cost Accounting and reporting system assists manager in their decision making process.

 

 

 

  • Define Cost Accounting, its advantages and limitations?

Cost Accounting: –

Cost Accounting is accounting for cost aimed at providing cost data, statements and reports for the purpose of managerial decision making. Cost Accounting “is the application of costing and cost accounting and cost accounting principles, methods and techniques to the science, art and practice of cost control and ascertainment of profitability. It includes the presentation of information derived there from the purpose of managerial decision –making.

The term ‘Costing’ and ‘Cost Accounting’ are many times used interchangeably. However, the scope of cost accounting is broader than that of costing which merely focuses on cost ascertainment. Following functional activities are included in the scope of Cost Accounting:-

  • (1) Cost Book-keeping it involves maintaining complete record of all costs incurred from their incurrence to their charge to departments’ products and service.
  • (2) Cost System Systems and procedures are devised for proper accounting of costs.
  • (3) Cost Analysis It involves and investigation into the uses of actual cost varying form the planned costs and fixation of responsibility for cost increase.
  • (4) Cost Comparisons Cost Accounting also includes comparisons between cost from alternative technologies, cost of different products and activities, and cost of same product or service over a period of time.
  • (5) Cost Control An important function of cost accounting is utilization of cost information for exercising control. This involves an examination of each cost in the light of benefit derived from in finding new and improved methods for reducing costs.
  • (6) Cost Comparison and Cost Control: Cost comparison helps in cost control. Such a comparison may be made from period to period by using the figures in respect of the same firm or of several units in an industry by employing uniform costing and inter –firm comparison methods.
  • (7) Identification of losses and inefficiencies: A good Cost Accounting system helps in identifying unprofitable activities, losses or incurrence of the cost.

 

Importance and Advantage of Cost Accounting:-

The primary advantages of a Cost Accounting System are as under:-

  • (1) Profit Measurement and Analysis: – Costs should be accurately ascertained and matched with revenues to measure profits of a firm. Further, Cost Accounting is useful for identifying the exact causes for decrease or increase in the profit/loss of the business.
  • (2) Cost Reduction: The application of cost reduction techniques operations research techniques and value analysis technique, helps in achieving the objective of economy in concern’s operations. Continuous efforts are being made by the business organization for inefficiencies in any form, so that appropriate actions are taken. The use of Standard Costing and Variances Analysis techniques points out the deviations from pre-determined level and thus demands suitable action to eliminate its recurrence. The cost of idle capacity can be easily worked out, when a concern is not working to full capacity.
  • (3) Financial Decision Making: Manager can obtain relevant information from the Cost Accounting System to serve as guides in making decisions involving financial considerations. Guidance may also be given by the Cost Accountant on various considerations. Guidance may also be given by the Cost Accountant on various decision making issues viz. whether to purchase or manufacture a given component whether to accept orders below cost which machine to purchase when a number of choices are available. The use of Marginal Costing techniques helps managers in taking short –term decisions.
  • (4) Price Determination: – Cost Accounting is quite useful for price fixation. It serves as guide to test the adequacy of selling price. The price determined may be useful for preparing estimates or filling tenders.
  • (5) Dispute and Issue –Solving:- A good cost accounting system provides cost figures for the use of Government, Wages Tribunal and other bodies for dealing and solving issues price taxation, price tariff protection, wages level fixation.

 

Limitations of Cost Accounting

  • (1) Cost Accounting lacks uniformity. Different organizations prepare cost records and reports in different depths detail and form. Even assumptions made regarding various costs differ.
  • (2) There is arbitrariness in apportionment of overheads, allocation of joint costs, and division of costs between controllable, determinations of overhead absorption rates.
  • (3) Cost accounts are prepared in addition to financial accounts. There are, number of costs, e.g. notional costs and decision making costs which do not appear in financial accounts. This necessitates reconciliation of financial profits and cost profit.
  • (4) Cost accounting is only one of the means of achieving cost control, efficiency improvement and motivation. It does not by itself achieve these objectives.
  • (5) Cost accounting has only a limited us in projecting future costs. It needs to be supplemented by various statistical tools.

 

  • What are the essential features of a good Cost Accounting system?

 

To be successful a good Cost Accounting System possesses the following essential features.

  1. Simple and easy to operate: – The system should be tailor-made, practical, simple and capable of meeting the requirement of business concern.
  2. Accuracy of data: – The data to be used by the Cost Accounting System should be accurate. Otherwise it may distort the output of the system.
  3. Relevance of data: The system should handle and report relevant data in use of manager for decision making. It should not sacrifice its utility by introducing meticulous and unnecessary, details.
  4. Management’s Role: The top Management should have a faith in the Costing System and should also provide a helping hand for its development and success.
  5. Participate Role of executives:- Necessary cooperation and participation of executives from various departments of the concern is essential for developing a good system of Cost Accounting.
  6. Cost –effective: – The cost of installing and operating the system should justify the results. The benefits from the system should exceed the amount to be spin on it.
  7. Smooth implementation: The system should be effectively implemented. A carefully phased program should be prepared by using network analysis for the introduction of the system.

 

 

 

 

 

  • What are the Pre-requisites for Installation of Cost Accounting System?

 

Installation of a Costing System:-

A cost accounting system is a set of plans, programs procedures and documentation designed to accumulate costs, assigns them to products, processes and jobs, and report cost information to management at all levels. It assists management in planning, control performance appraise analysis of   product profitability and optimum utilization of physical and financial resources for achieving organizational objectives.

The following consideration should be specifically taken into account:-

  • Design to suit specific needs: – The system should be designed as to serve the specific needs of the organization.
  • In-depth examination or production details: – Before installing the system management should make an, in-depth study of nature of products and processes, technologies, Plant layout, nature of materials used so that the cost accounting system is tuned to the requirement of the business.
  • Cost Benefit Analysis: – The benefit from the proposed cost accounting system far exceeds the cost involved. The best system, if cost exceeds benefits becomes useless.
  • Location of cost Office: – Costing department obtains basic data mainly from accounts department; Most of this data is related to production activity.
  • Codification: – All costs relating to all products of al departments should preferably be coded. This will increase speed in handling and processing of costs. Codification also facilitates computerization of costing system.
  • Continuous Monitoring: – Operation of cost accounting system should be continuously monitored so that deficiencies do not creep in, methodical work is not replaced by short cuts and the system is always kept up –to –date.

Difficulties in Installing Cost Accounting System:-

  1. Lack of enthusiasm and support from top management because they are not fully convinced about the benefits from such system.
  2. Resistance from production staff and people at different levels in other departments because they are fear getting subjected to additional controls.
  3. Resistance from accounting staff as they believe that their work would increase.
  4. Shortage of trained and well qualified staff.
  5. Over enthusiasm to have an unnecessarily detailed costing structure or keeping it too simple due to too much concern for cost.
  6. High cost of installing the system.
  7. Failing to keep the system up-to –date.

 

 

 

 

  • How are costs classified on the basis of Time Period?

 

On the basis of Time Period: – Costs are classified into:-

  • (1) Historical Costs: – Costs relating to the past time period; Cost which has already been incurred.
  • (2) Current Costs: – Costs relating to present period.
  • (3) Pre –determined Cost: – Costs relating to the future period; cost which is computed in advance, on the basis of specification of all factors affecting it.

 

  • How are costs classified on the basis of Behavior, Nature & Variability?

 

On the basis of Behavior/ Nature/ Variability: Costs are classified into:-

  • (1) Variable Costs: – These are costs which tend to vary or change in relation to volume of production. They increase in total as production increase and vice versa e.g. cost of raw material direct wages etc. However, variable costs per unit are generally constant for every unit of the additional output.
  • (2) Fixed cost: – Theses are costs which remain constant at various levels of production. They are not affected by volume of production e.g. Factory Rent, Insurance etc. Fixed costs per unit vary inversely with the volume of production i.e. if production increases fixed cost per unit decrease and vice –versa. Sometimes, these are also known as Capacity Costs or Period Costs.

 

  • (3) Semi- Variable Costs: – These are costs which are partly fixed and partly variable. Theses are fixed up to a particular volume of production and become variable thereafter for that next level of production. Hence they are also called Step Costs. Some examples are Repairs and Maintenance, Electricity, Telephone etc…

 

  • How are costs classified on the basis of Elements?

On the basis of Elements: – Costs are Classified into:-

  • (1) Materials: – Cost of tangible, physical input used in relation to output/ production; e.g. cost of raw materials, consumable stores, maintenance items etc.
  • (2) Labour :– Cost incurred in relation to human resources of the enterprises; e.g. wages to workers, Salary to office staff, Training Expenses etc.
  • (3) Expenses: – Cost of operating and running the enterprise, other than materials and labour; this is the residual category of costs e.g. Factory Rent, Office Maintain Nance Sales man salary etc.

 

  • How are costs classified on the basis of Relationship?

 

On the basis of relationship: Costs are classified into:-

  • (1) Direct Costs:- Costs which are directly related to /identified with/ attributable to a Cost Center or a Cost unit g. Cost of basic raw material used in the finished product wages paid to site labour in a construction contract etc.
  • (2) Indirect Costs- Costs which are not directly identified with a cost center or a cost unit. Such costs are apportioned over different cost centers using appropriate basis e.g. Factory Rent incurred over various departments; Salary of supervisor engaged in overseeing various construction contracts etc.

 

Note: – All indirect costs are collectively called as Overheads, since they are generally incurred over various products (cost unit), various departments (cost centers) and over various head of expenditure accounts.

 

 

  • How are costs classified on the basis of Controllability? What are the aspects affecting Control?

 

On the basis of Controllability: Costs are Classified into:-

  • (1) Controllable Costs: – Costs which can be influenced and controlled by managerial action. However, Controllability is a relative term and is subject to the following factors.
  1. Time: – Certain costs are controllable in the long run and not in the short run.
  2. Decided at a particular location/cost center. If rent agreements of all factory premises are executed centrally at the Head Office, factory manager cannot control the incurrence of cost.
  3. Product/ Output: – Certain costs are controllable by reference to one product or market segment and not by reference to the other. For example, cost of common raw material input for exports is lower than that of domestically sold goods since excise duty concession/duty drawback is available for export sales.
  • (2) Non-controllable Costs- These are costs that cannot be influenced and controlled by a specific member of organization. The line of difference between controllable and non-controllable costs is thin.

 

              Note: – No cost is uncontrollable. Controllability is subject to the factor laid down above.

  • How are costs classified on the basis of Normality?

        On the basis of normality: Costs are classified into;-

  • (1) Normal Cost: – Cost which can be reasonably expected to be incurred under normal, routine and regular operating conditions.
  • (2) Abnormal Cost: -Costs over and above normal cost; which is not incurred under normal operating conditions e.g. fines and penalties.

 

  • Enumerate the types of Costs on the basis of Functions.

 

         On the basis of Functions: Costs are classified as under:-

  • Production Cost: – The cost of the set of operations commencing with supply of materials, labour and services and ends with the primary packing of product. Thus it is equal to the total Direct Materials, Direct Labour, Direct Expenses and Production Overheads.
  • Administration Cost :- The cost of formulating the policy, directing the organization and controlling the operations of the undertaking, which is not directly related to production, selling, distribution, research or development activity or function. Some examples are Office Rent. Accounts Department Expenses, Audit and Legal Expenses, Directors Remuneration etc.
  • Selling Cost: – The cost of seeking to create and stimulate demand and of securing orders. These are sometimes called marketing costs. Some examples are Advertisement, salesman Remuneration, Show –room expenses, Cost of samples etc.
  • Distribution Cost: – The cost of the sequence of operations which begins with making the packed product available for dispatch and ends with making the reconditioned returned empty package, if any available for re-use. Some examples are Distribution Packing (secondary packing), carriage outwards, maintenance of delivery vans, expenditure incurred in transporting articles to central or local storage, expenditure incurred in moving articles to and from prospective customers (as in Sale or Return) etc.
  • Research Cost: – The cost of researching for new or improved products, new applications or materials or improved methods.
  • Development Cost: – The cost of the process which begins with the implementation of the decision to produce anew or improved product, or to employ a new or improved method and ends with commencement of formal production of that product of by that method.
  • Pre-production Cost: – The part of development cost incurred in making a trial production run prior to formal production.
  • Conversion Cost: – The sum of direct wages, direct expenses and overhead cost of converting raw materials to the finished stage or converting a material from one stage of production to the other.

 

  • Write short notes on period costs and product cost. Why should product costs be computed?

 

On the basis of Attributability to the product: – Costs are classified into

  • Period Costs: – Theses are costs which are not assigned to the product but are charged as expenses against the revenue of the period in which they are incurred. Non-manufacturing costs e.g. Selling and Distribution Costs are generally recognized as period costs. These costs are not included in inventory valuation.
  • Product Costs:Theses are costs which are assigned to the product and are included in inventory valuation. These are also called as Inventorial costs. Under absorption Costing, total manufacturing costs are regarded product costs while under marginal costing, only variable manufacturing costs are considered.

The Purpose of computing products costs are as under:-

  1. Preparation of Financial Statements: – Focus on inventory valuation and reporting profits.
  2. Product Pricing: – Focus on costs assigned and incurred on the product till it is made available to the customer/ user.
  3. Cost- plus Contracts with Government Agencies: – Focus is on reimbursement of costs specifically assigned to the particular job/contract.

 

 

 

  • List out the various items of costs on the basis of relevance to decision making.

 

On the basis of Relevance to decision making: – costs are classified into:-

  1. Relevant costs viz., Managerial Costs, Differential Costs, Opportunity Costs etc.
  2. Irrelevant Costs viz., Absorbed Fixed costs, Sunk Costs, Committed Costs etc.

Relevant Costs: – These are costs which are relevant and useful for decision making purpose.

 

  • Marginal Cost –Marginal costs is the total variable cost i.e. prime cost plus variable overheads. It is assumed that variable cost varies directly with productions whereas fixed cost remains fixed irrespective of volume production. Marginal Cost is relevant cost for decision making as this cost will be incurred in future for additional units of production.

Differential Cost- It is the change in costs due to change in the level of activity or pattern or method of production. Where the change results in increase in cost it is called incremental cost, where if costs are reduced due to decrease of output, the difference is called decremental costs.

  • Opportunity Costs- This refers to the value of sacrifice made or benefit of opportunity foregone in accepting an alternative course of action, for example a firm may finance its expansions plan by withdrawing money from its bank deposits. In such a case the loss of interest on the bank deposit is the opportunity cost for carrying out eh expansion plan. Opportunity cost is relevant cost where alternatives are available. However, opportunity cost does not find nay place in formal accounts and is computed only for decision making and analytical purpose.
  • Out of pocket costs- These are costs which entail current or near future outlays of cash for the decision at hand as opposed to costs which do not require any cash outlay such as depreciation. Such costs are relevant for decision making as these will occur in near future. It is that portion of total cost s which involves cash outflow. This concept is a short –run concept and is used in decision relating to fixation of selling price in recession, make or buy, etc. Out of pocket costs can be avoided or saved if a particular proposal under consideration is not accepted.
  • Replacement cost – It is the cost at which there could be purchase of an asset or material identical to that which is being replaced or revalued. It is the cost of replacement at current market price and is relevant for decision making.
  • Imputed Costs – These are notional cots appearing in the cost accounts only e.g. notional rent charges, interest on capital for which no interest has been paid. Where alternative capital investment projects are being evaluated, it is necessary to consider the imputed interest on capital before a decision is arrived at, as to which is the most profitable project.
  • Discretionary costs – These are “escapable” or “avoidable” Costs. These can be avoided if a particular course of action is not chosen. In other words, these are costs, which are essential for the accomplishment of a managerial objective.

 

  1. Irrelevant Cost:These are costs which are not relevant or useful for decision –making.
    • Sunk Cost: – It is a cost which has already been incurred or sunk in the past. It is not relevant for decision making and is caused by complete abandonment as against temporary shut down. Thus, if a firm has obsolete stock of materials amounting to Rs 10,000 which can be sold as scarp for Rs 2,000 or can be utilized in a special job, the value of opening stock of Rs 10,000 is a sunk cost and it not relevant for decision making.

 

  • Committed cost: – A cost which has been already committed by the management is not relevant for decision making. This should be contrasted with discretionary costs, which are avoidable costs.

 

  • Absorbed Fixed Costs- Fixed costs which do not change due to increase or decrease in activity is irrelevant for decision –making. Although such fixed costs are absorbed in cost of production at a normal rate, they are irrelevant for managerial decision –making. However if fixed costs are specific, they become relevant.

Write short notes on Explicit and Implicit Costs.

  1. Explicit Costs – These are also known as out of pocket costs. They refers to costs involving/ immediate payment of cash, Salaries, wages, postage, and telegram, printing and stationery, interest on loan, etc. are some example of explicit costs involving immediate cash payments.
  2. Implicit Costs – These costs do not involve any immediate cash payment. They are not recorded in the books of accounts. They are also known as economic costs or imputed costs.

 

  • Define the terms (a) Estimated Costs (b) Shut down Costs and (c) Absolute Costs
  1. Estimated Costs ;- Kohler defines estimated costs as “the expected cost of manufacture or acquisition , in terms of a unit of product computed on the basis on information available in advance of actual production or purchase”. Estimated costs are prospective costs since they refer to prediction of costs.
  2. Shut down costs- These are costs which continue to be incurred even whine a plant is temporarily shut-down e.g. rent, rates, depreciation, etc. These costs cannot be eliminated with the closure of the plant. In other words, all fixed costs which cannot be avoided during the temporary closure of a plant will be known as shut down costs.
  3. Absolute cost: – These costs refer to the cost of any product, process or unit in its totality. When costs are presented in a statement form, various cost components may be shown in absolute amount or as a percentage of total cost or as per unit cost or all together. Here the costs depicted in absolute amount may be called absolute costs and are base costs on which further analysis and decision are based.

 

  • Explain various types of Cost in Brief?

Total Cost: – This is the sum of all the items of expenses whether paid or not which have been insured in the production sale or distribution or in rendering of a service.

 

  • What are the parameters of Cost expressions?

Cost is expressed by reference to the following parameters:

  1. Time parameter- Cost period
  2. Location parameter – Cost center
  3. Output/ Product parameter – Cost unit

 

  • What is meant by Cost Period?

The period to which the Costs relates is called Cost period. It is also called the Control period since cost ascertainment is for the purpose of control. Generally, the cost period is shorter than the financial period used for reporting purposes.

For example, if the production process for converting raw material into finished product requires 15 days, it may be considered as a Cost period.

  • Define a Cost Unit. Give suitable illustrations.

Cost unit: – It is a unit of production, services or time or combination of these, in relation to which costs may be ascertained or expressed. It should be one with which expenditure can be most readily associated.

An appropriate cost unit should be selected keeping in view of the following:-

  • Cost units should suit the business
  • It should be most natural to the business
  • Cost unit should be readily understood and accepted by all
  • Cost unit should be uniformly maintained over a period of time and should be same or similar products

Cost units differ from one business to the other. They are usually units of physical measurement like number, weight, area, volume, time length and value. Some illustration of cost units are as follows:-

Examples of Cost units and Methods of Costing In various industries.

 

Bricks Per 1,000 bricks Unit Costing
Cement Per ton Process Costing
Road Construction Per kilometer or per mile Job costing
Advertising Each job Job
Interior Decoration Each job Job
Made to Order Number Job costing
Readymade Number Batch costing
Tyres and Tubes Batch Each Batch costing
Toy Each batch Batch costing
Pharmaceuticals 1,000 nos.., tablets, strips, capsules, Batch Costing
Water supply Per 1,000 liter Operating Costing
Bus service Passenger –kilometer Operating Costing
Education Per student hour Operating costing
Electricity Per kilowatt hour Operating costing
Goods Transport Per ton-mile or per ton –kilometer Operating costing
Hospital Per bed per day / per out patient Operating Costing
Hotel Per guest per day or per guest, per meal etc Operating costing
Bridge Construction Each contract Contracting costing
Ship Building Each ship Contract costing
Mining Per ton Process costing
Petrochemical Tons, Gallons liters Process costing
Steel Per ton Process Costing
Textile Per meter Process costing
Sugar Per tone Process
Paper Per kg/tone Process
Chemical Per kg/liter/tone Process
Fertilizer Per tone Process
Oil Refinery Per gallon Process
Automobile Number Processing
Colliery Per tone Output
Bicycle Manufacturing Number Multiple costing

 

What is a Responsibility Center? What are its types?

Meaning:

  • It is an activity center of a business organization entrusted with a special task.
  • It is a unit of function of a business organization headed by an executive responsible for its performance.

Types of Responsibility Centers: –

Particulars Cost Center Revenue Center Profit Centers Investment Centers
Meaning A Center for which a standard amount of cost is predetermined and used for control. A center devoted to raising revenue (no responsibility for production) A center whose performance is measured in terms of income earned and cost incurred (profit earning) A center responsible for earning profits and also for asset utilization.
Primary Responsibility Cost reduction and cost control. Generation of sale revenue. Budgeted profits less actual profits Budgeted ROI less actual ROI
Performance evaluation

 

  • Write short notes on Cost Center? Discuss the various types of Cost Centers.

Cost Centre: A center refers to a section, segment or subdivision of an organization of which costs are charged. A cost centre is “location, person or it’s of equipment (or group of these) for which costs may be ascertained and used for the purpose of control”. For example a cost center may be

  • Allocation e.g.., department’s sales territories etc.
  • A person e.g., engineers salesman, machine operators etc.
  • An item of equipment, e.g., machines delivery vans etc.

 

Classification:-

Based on type: –

Personal Cost Center Impersonal Cost Center
It consists of a person of group of persons. It Consists of a location or an item of equipment (or group of these)

 

Based on Role:-

 

Production cost center Service Cost center
It is a cost centre where raw material is processed and converted into finished product. It is a cost centre which serves as an ancillary unit and renders service to a production cost centre.
Here both direct and indirect costs are incurred. Here only indirect costs are incurred. There are no direct costs as there is no measurable and saleable output.
Machine shops, welding shops and assembly shops are examples of production Cost Centers. Power- house, Gas production shop, material service centers, plant maintenance centers are example of since cost centers.

 

  • Based on Activity : –

 

Operation Cost Center Process Cost Center
It consists of machines and or persons carrying out similar operations. It consists of machines and /or persons, engaged on a specific process or a continuous sequence of operations.
All machines operations performing the same operations are brought together under a Cost Center, the process being ascertainment of cost of each operation irrespective of its location inside the factory. Cost is analyzed and related to a series of operations in sequence. Generally, these constitute a single location, as in Oil Refineries and other process industries.

 

  • Define the Advantages of Value Analysis

Advantages of value analysis are:-

  • It is a powerful tool of cost reduction which leads to direct improvement in profitability.
  • It improves customer goodwill and thereby helps to maintain and increase sales. This is because value analysis makes a close study of the product to provide higher satisfaction to customers in respect of use value and esteem value.
  • Value analysis ensures higher productivity by continuous process of searching for improvement in all fields.
  • It helps in achieving greater production from a given amount of resources of capital employee time, space etc.
  • Simplification and standardization of design and methods solve crisis caused by extensive verity and complex methods.
  • It raises the moral of employee and infuses in them a spirit of co-operation.
  • Distinguish Cost Accounting and Financial Accounting?

Comparison of Cost Accounting and Financial Accounting

Basis Financial Accounting Cost Accounting
Purposes To prepare P & L A/c and Balance sheet for presentation to shareholders and other external users. To provide details cost information to management i.e. internal user.
Statutory requirement This is mandatory under Companies Act. Income Tax Act etc. It is voluntary except in specified in specified industries
Cost & Profit Analysis It is reveals overall profit /loss and cost. It reveals cost and profit or loss of each product, department etc.
Control aspect It lays emphasis on recording to Transactions. It lays emphasis on cost control.
Periodicity P & L A/c and Balance sheet Reported Annually. Cost statements are regularly and frequently prepared at short intervals and presented to management.
Past and Future Cost It is concerned with past records. It is concerned with past and future costs.

 

  • What is Direct Expenses or chargeable Expenses

Direct Expenses or Chargeable Expenses:These are expense which can be allocated directly to jobs, products, processes, cost centers or cost units. According to CIMA, London, Direct Expenses are cost other than material and wages which are incurred for a specific product or saleable services.

    Nature of Direct Expenses:

  • These are expenses other than Direct Material and Direct Labour
  • These are either allocated or charged completely to cost center or cost unit.
  • These are included in the prime cost of a product.

Examples:-

  • Hire charges of special machinery or plant for a particular production order or job.
  • Payment of royalties
  • Cost of special models, designs and patterns
  • Experimental cost before undertaking the concerned job
  • Traveling and conveyance expenses incurred in connection with a particular job
  • Sub- contracting expenses or outside work costs, where jobs are sent out for special processing.

 

  • Explain various methods of costing.

Businesses vary in their nature and in the type of products or service they produce. Hence different methods of cost ascertainment are used in different business. The output has to be cost so that costing methods to be employed are also determined with due regard to the method of production and the unit of cost used. The various methods of costing can be summarized as under:

Job Costing – Under this method, the cost of each job is ascertained separately. It implies that the direct cost of each job is traceable and identifiable. It is suitable in all cases where work is undertaken on receiving a customers order/ assignment. Some examples are: printing press, motor workshop, etc

Batch Costing: – it is extension of job costing. It is used where the output under a particular work order consists of similar units. It may not be economically feasible to ascertain cost per unit. Hence a collection or lot of units called a batch is taken for cost ascertainment purposes. Each batch is treated as unit of cost and thus separately coasted. Here cost per unit is determined by dividing the cost of the batch by the number of units produced in the batch. Examples: – Pharmaceuticals, production of component parts like cycle rims, TV monitor screens etc in bulk for subsequent assembly.

Contract Costing: – A larger job is called a contract. Generally, execution of work is distributed over two or more financial years. Hence, the cost of each contract is ascertained separately. It is suitable for firms engaged in the construction of bridges, roads building etc.

Single or Output Costing: – Cost is ascertained for a product, the product being the only one produced like bricks, coals, etc.

Process Costing and Operation Costing: – The cost of completing each stage of work is ascertained like cost of making pulp and cost of making paper from pulp. In mechanical operations, the cost of each operation may be ascertained separately the name given is operation costing.

 

Operation or Service costing: – Ascertainment of cost of rendering or operating a service is called Service Costing or Operating Costing. It is used in the case of concerns rendering service like transport, cinema, hotels, etc where there is no identifiable tangible Cost unit.

Multiple Costing: – It represents a combination of two or more methods of costing outlined above. For example, if a firm manufacturing bicycles including its components; the parts will be costed by batch costing system but the cost of assembling the bicycle will be computed by the single or output costing method. This whole system of costing is known as multiple costing.

The following table summarizes the various methods of costing applied in different industries:-

Nature of output Method Cost Ascertainment Examples of Industries
Customers Specifications: –

Single unit

Job Costing For each order/ assignment/ job Automobile workshop/ Interior Decoration
Number of similar units Batch Costing For each batch/ lot of units produced Printing press- for Cards invitations etc/pharmaceuticals
Execution of work Contract Costing For each contract Civil Construction /Ship Building
Similar units of a single product produced by : single process Unit or output or single costing For the entire activity, but averaged for the output Quarries, Brickworks, Colliery, Paints etc
A series of process Process Costing  or Operation Costing For each process or operation Oil, Refining, Breweries, Chemicals etc
Consisting of multiple varieties of activities and processes Multiple Costing Combinations of any of the methods listed above. Bicycle Assembly
Rendering  of Services Operating Costing For every type of service Transport, Hotels, Cinema

 

 

 

 

 

 

  • What do you mean by “Technique of Costing”?

 

       

In addition to the above methods of costing there are certain techniques of costing which are used along with any of the above method. Theses techniques serve the special purpose of managerial control and policy. Some of the important techniques are as follows:-

1)   Standard Costing It is a valuable technique of cost control.
2)   Budgetary Control It is also a technique that is used to control costs
3)   Managerial costing

 

 

It is also technique to help the management in decision making and profit planning. In this technique, only variable costs are charged to products and fixed costs are treated as period costs and transferred to P & L A/c.
4)   Absorption costing

 

As against marginal costing in this technique total cost i.e. fixed and variable charged to products.
5)   Uniform costing

 

 

It is a system whereby several undertaking uses the same costing principles and practices so as to make cost data comparable.

 

  • What are the types of cost ascertainment?

 

For ascertaining cost following types of costing are usually used: –

  • Uniform Costing:When a number of firms in an industry agree among themselves to follow the same system of costing, by adopting common technology for various items and processes they are said to follow a system of uniform costing. Such a system of cost ascertainment facilitates inter-firm comparison, determination of true costs of the industry.
  • Marginal costing: – It is defined as the ascertainment of marginal cost by differentiating between fixed and variable costs. It is used to ascertain effect of changes in volume or type of output on profit. It is a tool of decision making on various management issues. Under this method, stocks are valued at variable cost. Fixed costs are treated as period costs and are not included in Stock valuation.
  • Absorption Costing:It is the practice of charging all costs, both variable and fixed to operations, process or products. Stocks are valued at cost inclusive of proportionate amount of fixed cost. This differs from marginal costing where fixed costs are excluded.
  • Direct costing:It is practice of charging all direct costs to operations processes or products leaving all indirect costs to be written off against profits in which they arise. It may be distinguished form Marginal costing, where only variable costs are identified with products.
  • Standard Costing: – It is the name given to the technique whereby actual costs are compared with already set standards. It thus a technique of both cost ascertainment and cost control. This technique may be used along with any method of costing. It is especially suitable where the manufacturing method involves production of standardized goods of repetitive nature.
  • Historical Costing:It is the ascertainment of costs after they have been incurred. This type of costing has limited utility.

 

  • What is difference between Cost estimation and Cost ascertainment?

 

Cost estimation: – Cost estimation is the process of predetermining the cost of the certain product or job. This predetermination of cost is based upon budgetary control, standard costing and variance analysis. Cost estimation is made to take the decision regarding buy/make or to fix the sale price of the product etc.

Cost ascertainment:Cost ascertainment is the process of determining the cost on the basis of actual data. Hence, computation of historical cost is called Cost ascertainment. Cost estimation and ascertainment are interrelated and very important to the management to have a sound costing system. The ascertainment of cost greatly helps in cost estimation of future period.

 

  • List some reports provided by the Cost Accounting department for decision making purpose.

The following is an illustrative list of reports and statements provided by the Cost Accounting Department for the use of managers for decision making purpose.

  1. General : –
    • Cost sheet: Setting out the total cost, analyzed into various elements of cost, giving comparative figures for various periods and or various departments.
    • Reconciliation of actual profit earned with estimated or budgeted profit.
    • Reports of Capital Expenditure, R & D Expenditure etc., compared with budgets.
  2. Material :
  • Materials Consumption Statements, showing total quantity of material issued for production, materials actually used in production and wastage.
  • The total cost of abnormally spoiled work in the factory and abnormal losses in the store. The total cost of inventory carried of raw materials, work in process and finished stock; the number of months for which stocks would be sufficient ( on the basis of average consumption)
  1. Labour
  • Labour utilization statements providing details about the total number of hours paid for, standard hours for the output, idle time hours, cost and causes thereof.
  • Labour turnover and the cost of recruitment and training of new employees.
  • Labour Overtime payment statement and the causes thereof.
  1. Overheads :
  • Overheads incurred compared with budgets.
  • The difference between the amount actually incurred (Actual Overheads) and The amount charged (Absorbed Overheads)
  1. Sales: –
  • Sales effected compared with budgets.
  • Statement or reasons for difference between budgeted and actual sales viz.., price, Quantity, Sales Mix etc.

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