Meaning of Cost Accounting:
As
the term itself suggests that cost accounting deals with cost. Cost is the
amount of resources given up in exchange for some goods or services. The
resources given up are money or money’s worth expressed in monetary terms.
The
Chartered Institute of Management Accountants, London (CIMA) defines cost as
“the amount of expenditure (actual or notional) incurred on, or attributable to
a specified thing or activity.” When the term is used as a verb it means ‘to
ascertain the cost of a specified thing or activity’.
However,
the process or technique of ascertaining cost of activities, processes,
products, or services is termed as costing. This technique consists of a body
of principles and rules, which govern the procedure of ascertaining costs. The
process of costing is the day-to-day routine of ascertaining costs, whatever
the costs ascertained may be and by whatever means these costs are determined.
The
official terminology of CIMA defines cost accounting as “the process of
accounting for costs from the point at which the expenditure is incurred or
committed to the establishment of its ultimate relationship with cost centers
and cost units. In its widest usage, it embraces the preparation of statistical
data, the application of cost control methods and the ascertainment of the profitability
of activities carried out or planned.” It is a formal mechanism by means of
which costs of products or services are ascertained and controlled. It provides
information to the management for taking all sorts of managerial decisions.
Objectives
of Cost Accounting:
Objectives of cost accounting are ascertainment of cost,
fixation of selling price, proper recording and presentation of cost data to
management for measuring efficiency and for cost control and cost reduction,
ascertaining the profit of each activity, assisting management in decision
making and determination of break-even point.
The aim is to know the methods by which expenditure on
materials, wages and overheads is recorded, classified and allocated so that
the cost of products and services may be accurately ascertained; these costs
may be related to sales and profitability may be determined. Yet with the
development of business and industry, its objectives are changing day by day.
Following are the main objectives of cost accounting:
1. To ascertain the cost per unit of the different products
manufactured by a business concern;
2. To provide a correct analysis of cost both by process or
operations and by different elements of cost;
3. To disclose sources of wastage whether of material, time
or expense or in the use of machinery, equipment and tools and to prepare such
reports which may be necessary to control such wastage;
4. To provide requisite data and serve as a guide for fixing
prices of products manufactured or services rendered;
5. To ascertain the profitability of each of the products
and advise management as to how these profits can be maximised;
6. To exercise effective control if stocks of raw materials,
work-in-progress, consumable stores and finished goods in order to minimise the
capital locked up in these stocks;
7. To reveal sources of economy by installing and
implementing a system of cost control for materials, labour and overheads;
8. To advise management on future expansion policies and proposed
capital projects;
9. To present and interpret data for management planning,
evaluation of performance
and control;
10. To help in the preparation of budgets and implementation
of budgetary control;
11. To organise an effective information system so that
different levels of management may get the required information at the right
time in right form for carrying out their individual responsibilities in an
efficient manner;
12. To guide management in the formulation and
implementation of incentive bonus plans based on productivity and cost savings;
13. To supply useful data to management for taking various
financial decisions such as introduction of new products, replacement of labour
by machine etc.;
14. To help in supervising the working of punched card
accounting or data processing through computers;
15. To organise the internal audit system to ensure
effective working of different departments;
Cost Accounting -
Elements of Cost
Direct or Indirect Materials
The
materials directly contributed to a product and those easily identifiable in
the finished product are called direct materials. For example, paper in books,
wood in furniture, plastic in water tank, and leather in shoes are direct
materials. They are also known as high-value items. Other lower cost items or
supporting material used in the production of any finished product are called
indirect material. For example, nails in shoes or furniture.
Direct Labor
Any wages
paid to workers or a group of workers which may directly co-relate to any
specific activity of production, supervision, maintenance, transportation of
material, or product, and directly associate in conversion of raw material into
finished goods are called direct labor. Wages paid to trainee or apprentices
does not comes under category of direct labor as they have no significant
value.
Overheads
Indirect
expenses are called overheads, which include material and labor. Overheads are
classified as:
- Production or
manufacturing overheads
- Administrative
expenses
- Selling Expenses
- Distribution
expenses
- Research and
development expenses
