Cost And Management Accounting PDF

COST AND MANAGEMENT ACCOUNTING  COST ACCOUNTING MEANING “Cost is the measurement in monetary terms of the amount of resources used for the purpose of production of goods or rendering of services”(Institute of Cost and Work Accounts (ICWA) India). cost accounting is concerned...

COST AND MANAGEMENT ACCOUNTING  COST ACCOUNTING MEANING “Cost is the measurement in monetary terms of the amount of resources used for the purpose of production of goods or rendering of services”(Institute of Cost and Work Accounts (ICWA) India). cost accounting is concerned with recording, classifying and appropriate allocation of expenditure for the determination of the cost of products or services, and for the suitably arranged data for purposes of control and guidance of information to management for decision making.  Cost means “the price paid for something”  Cost ascertain is computation of actual cost incurred.  Cost estimation is process of determining cost of goods and services. COST, COSTING, COST ACCOUNTING AND COST ACCOUNTANCY: COST: Cost is defined as the amount of expenses (actual or notional) incurred on or attributable to specified thing or activity. (direct or indirect) For example – Cost of preparing one cup of tea is the amount incurred on the elements like material, labor and other expenses, similarly cost of offering any services like banking is the amount of expenditure for offering that service. This cost of production or cost of service can be calculated by ascertaining the resources used for the production or services. Costing: Costing is defined as, “the techniques and processes of ascertaining(calculating) costs” (The Chartered Institute of Management Accountants (CIMA). Costing means finding of cost by any process or technique. According to Wheldon, ‘Costing is classifying, recording, allocation and appropriation of expenses for the determination of cost of products or services and for the presentation of suitably arranged data for the purpose of control and guidance of management. Cost Accounting :- process Cost Accounting primarily deals with collection, analysis of relevant of cost data for interpretation and presentation for various problems of management. Cost accounting accounts for the cost of products, service or an operation. It is defined as, ‘the establishment of budgets, standard costs and actual costs of operations, processes, activities or products and the analysis of variances, profitability or the social use of funds’. Cost Accountancy: CIMA defines Cost Accountancy as “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 as well as presentation of information for the purpose of managerial decision making”. Cost Accountancy is a science as it is a knowledge which a cost accountant should possess to carry out his duties and responsibilities. It is an art as it required skills by the cost accountant to apply principles of cost accountancy to various managerial problems like price, expenditures etc. Practice refers to the efforts taken by the Cost Accountant in the field of cost accountancy. Along with the Theoretical knowledge, cost accountant should possess sufficient practical training and exposure to real life costing problems. SCOPE OF COST ACCOUNTING 1) Costing: It is ascertainment of cost of products, processes, jobs services etc.it is the most important function of cost accounting. 2) Cost Recording: It is a maintaining record of all the cost (expenses) incurred during the process of the production of the final products/ services. Such records are kept on the basis of double entry system. 3) Cost Analysis: All the costs that are recorded are analyzed and categorized separately. Example: Direct and Indirect Costs, Fixed and Variable Costs, etc. 1) Cost Control: Cost Accounting, compares the actual cost and standard cost, the difference between the two are analyzed and used for cost control purpose. 2) Cost Report: Cost accounting generates periodical reports such as weekly, monthly reports that is used by the management for taking decisions. These reports are used for planning and controlling, performance appraisal and management decision making. 3) Cost Audit: It is the verification of cost accounts and to check on the progress of cost accounting plan. Its main focus is on the expenditure and efficiency of performance. IMPORTANCE OF COST ACCOUNTING: Cost accounting has many importance. Specially, the following parties are benefitted from it.  Importance to management Management is highly benefitted with the introduction of cost accounting. It helps to ascertain the cost and selling price of the product. Cost data help management to formulate the business policies. Make or buy descision  Importance to investors Investors want to know the financial conditions and earning capacity of the business. An investor must gather information about organization before making investment decision.  Importance of consumers The aim of costing is to reduce the cost of production to minimize the profit of business. Consumers get quality goods at a lower price.  Importance to Employees Cost accounting helps to fix the wages of the workers. Efficient workers are rewarded for their efficiency. It helps to induce incentive wage plan in business.  Importance to Government Government agencies to determine excise duty and income tax. Government formulates tax policy, industrial policy, export and import policy based on the information provided by the cost accounting. OBJECTIVES OF COST ACCOUNTING:  Ascertaining the Cost: It refers to the cost for a specific product or activity with a reasonable degree of accuracy.  Determining the Selling Price: It helps in finalizing the cost of the product after which the profit margin is added by the manufacturer and thus the selling price of the product is fixed.  Cost Control and Cost Reduction: It helps in improving profitability by controlling and reducing costs. This objective is important for current scenario due to increase in competition in the business world.  Management in Decision Making: Taking Management decision in respect of the price of the product for which the comparison of actual and standard cost is required to analysis the causes of variation and to take corrective decisions.  Ascertaining the Profit: It helps in ascertaining the profit of the business by matching the cost with the revenue of that activity. The purpose is to determine the profit or loss of any activity on an objective basis.  To Provide basis of operating policies  To provide information about inefficient and carelessness  To provide information about actual situation of production activity  To inform the principles and procedures to be followed in Costing System  To prepare comparative analysis through data collection  To estimate cost  To disclose and minimize the waste  Cost units  The Chartered Institute of Management Accountants, London, defines a unit of cost as “a unit of quantity of product, service or time in relation to which costs may be ascertained or expressed”. The forms of measurement used as cost units are usually the units of physical measurements like number, weight, area, length, value, time etc.  Following are some examples of cost unit. Industry/product Cost unit basis  Automobile Numbers  Brick works per 1000 bricks  Cement per Tonne  Chemicals Litre, gallon, kilogram, ton  Steel Tonne  Sugar Tonne  Transport Passenger-km, tonne- km ? Cost Centre and Profit Centre  Cost Centre – According to Chartered Institute of Management Accountants, London, cost centre means “a location, person or item of equipment (or group of these) for which costs may be ascertained and used for the purpose of cost control”. Cost centre is the smallest organizational subunit for which separate cost collection is attempted. them cost center refers to one of the convenient unit into which the whole factory organization has been appropriately divided for costing purposes. Each such unit consists of a department or a sub-department or item of equipment or , machinery or a person or a group of persons.  Profit Centre – A profit centre is that segment of activity of a business which is responsible for both revenue and expenses and discloses the profit of a particular segment of activity. Profit centers are created to delegate responsibility to individuals and measure their performance.( arya junaisisr rineesh) Cost revenue compare  Cost classification  By Nature, or Elements. According to this classification the costs are classified into three categories i.e., Materials, Labour and Expenses.  Materials can further be sub-classified as raw materials components, spare parts, consumable stores, packing materials etc.  This helps in finding the total cost of production and the percentage of materials (labour or other expenses) constituted in the total cost. It also helps in valuation of work-in- progress.  By Functions: This classification is on the basis of costs incurred in various functions of an organization ie. Production, administration, selling and distribution.  Manufacturing and Production Costs are costs involved in manufacture, construction and fabrication of products.  Commercial Costs are (a) administration costs (office staff nte salary) (b) selling and distribution costs. Continue…  By Degree of Traceability to the Product : According to this, costs are divided as direct costs and indirect costs.  Direct Costs are those costs which are incurred for a particular product and can be identified with a particular cost centre or cost unit. Eg:- Materials, Labour.  Indirect Costs are those costs which are incurred for the benefit of a number of cost centre or cost units and cannot be conveniently identified with a particular cost centre or cost unit. Eg:- Rent of Building, electricity charges, salary of staff etc.  By Changes in Activity or Volume: According to this costs are classified according to their behavior in relation to changes in the level of activity or volume of production. They are fixed, variable and semi-variable.  By Time: Historical cost and predetermined cost.  By Controllability: Controllable and non controllable.  By Normality: Normal cost and Abnormal cost  Types, Methods and Techniques of Costing  Basically, there are two principal methods of costing, namely (i) Job Costing, and (ii) Process costing.  Job costing: It refers to a system of costing in which costs are ascertained in terms of specific jobs or orders which are not comparable with each other. Industries where this method of costing is generally applied are Printing Process, Automobile Garages, Repair Shops, Shipbuilding, House building, Engine and Machine construction, etc. Job Costing includes the following methods of costing:  (a) Contract Costing: Although contract costing does not differ in principle from job costing, it is convenient to treat contract cost accounts separately. The term is usually applied to the costing method adopted where large scale contracts at different sites are carried out, as in the case of building construction.  (b) Batch Costing: This method is also a type of job costing. A batch of similar products is regarded as one job and the cost of this complete batch is ascertained. It is then used to determine the unit cost of the articles produced. It should, however, be noted that the articles produced should not lose their identity in manufacturing operations.( water bottle, number) Continue….  (c) Terminal Costing: This method is also a type of job costing. This method emphasizes the essential nature of job costing, ie, the cost can be properly terminated at some point and related to a particular job.  (d) Operation Costing: This method is adopted when it is desired to ascertain the cost of carrying out an operation in a department, for example, welding. For large undertaking, it is frequently necessary to ascertain the cost of various operations.  2. Process Costing: Where a product passes through distinct stages or processes, the output of one process being the input of the subsequent process, it is frequently desired to ascertain the cost of each stage or process of production. This is known as process costing. This method is used where it is difficult to trace the item of prime cost to a particular order because its identity is lost in volume of continuous production. Process costing is generally adopted in textile industries, chemical industries, oil refineries, soap manufacturing, paper manufacturing, tanneries, etc. Continue…  3. Unit or single or output or single output costing: This method is used where a single article is produced or service is rendered by continuous manufacturing activity. The cost of the whole production cycle is ascertained as a process or series of processes and the cost per unit is arrived at by dividing the total cost by the number of units produced. This method is suitable in industries like brick-making, collieries, flour mills, cement manufacturing, etc. this method is useful for the assembly department in a factory producing a mechanical article eg. Bicycle.  4. Operating Costing: This method is applicable where services are rendered rather than goods produced. The procedure is same as in the case of single output costing. The total expenses of the operation are divided by the units and cost per unit of services is arrived at. This method is employed in Railways, Road Transport, Water supply undertakings, Telephone services, Electricity companies, Hospital services, Municipal services, etc. Continue…  5. Multiple or Complete Costing: Some products are so complex that no single system of costing is applicable. It is used where there are a variety of components separately produced and subsequently assembled in a complex production. Total cost is ascertained by computing component costs which are collected by job or process costing and then aggregating the costs through use of the single or output costing system. This method is applicable to manufacturing concerns producing Motor Cars, Aeroplanes, Machine tools, Type-writers, Radios, Cycles, Sewing Machines, etc.  6. Uniform Costing: It is not a distinct method of costing by itself. It is the name given to a common system of costing followed by a number of firms in the same industry. This helps in comparing performance of one firm with that of another.  7. Departmental Costing: When costs are ascertained department by department, the method is called “Departmental Costing”. Usually, for ascertaining the cost of various goods or services produced by the department, the total costs will have to be analysed, say, by the use of job costing or unit costing.  Elements of Cost Elements of Cost Material Labour Expenses Direct Direct Direct Prime cost Indirect Indirect Indirect Prime cost + overhead = total Production or cost work Administration Overhead Selling Distribution  Nammale product nn nalla vela aaaan adodoppam prime cost 30 percentage koravanengl nammale overhead adigaavum appo ath korkkalaan oru vazhii. Continue…  By grouping the above elements of cost, the following divisions of cost are obtained.  1. Prime cost = Direct Materials + Direct Labour + Direct Expenses  2. Works or Factory Cost = Prime Cost + Works or Factory Overheads  3. Cost of Production = Works Cost + Administration Overheads  4. Total Cost or Cost of Sales = Cost of Production + Selling and Distribution Overheads  Illustration 1. Find the Prime Cost, Works Cost, Cost of production, total Cost and profit from the following:- Direct Materials  Direcct materials Rs.20000; Direct Labour Rs. 10000; Factory Expenses Rs. 7000; Administration Expenses Rs. 5000; Selling Expenses Rs. 7000 and Sales Rs.60,000.