Cost Accounting

Cost accounting may be regarded as a specialized branch of accounting which involves classification, accumulation, assignment and control of costs. The Costing terminology of C.I.M.A. London defines cost accounting 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”. `Wheldon defines cost accounting as “classifying, recording and appropriate allocation of expenditure for determination of costs of products or services and for the presentation of suitably arranged data for purposes of control and guidance of management”. It is thus, a formal mechanism by means of which costs of products or services are ascertained and controlled. Cost accounting is different from costing in the sense that the former provides only the basis and information for ascertainment of costs. Once the information is made available, costing can be carried out arithmetically by means of memorandum statements or by method of integral accounting.

OBJECTIVE OF COST ACCOUNTING

1. To analyze and classify all expenditures.
2. To arrive at the cost of production of every unit, job, operation.
3. To indicate to the management any inefficiencies and the extent.
4. To provide data for periodical profit and loss accounts and balance sheets at intervals.
5. To reveal sources of economies in production.
6. To provide actual figures of cost for comparison with estimates and to serve as a guide for future estimates or quotations and to assist the management in their price-fixing policy.
7. To show where standard costs are prepared.
8. To present comparative cost data for different periods and various volumes of output.

9. To provide a perpetual inventory of stores and other materials.

10. To provide information to enable management to make various short-term decisions.

Financial Accounting vs Cost Accounting

Financial accounting, cost accounting are the main branches of accounting. Let us take a look at Financial Accounting vs Cost Accounting to understand each of them better.

IMPORTANCE OF COST ACCOUNTING

The limitations of financial accounting have made the management realize the importance of cost accounting. Whatever may be the type of business, it involves expenditure on labor, materials and other items required for manufacturing and disposing of the product. Cost accounting increases the overall productivity of an organization and serves as an important tool in bringing prosperity to the nation. Thus, the importance of cost accounting can be discussed under the following headings:

(a) Costing as an Aid to Management

1. Cost accounting helps in periods of trade depression and trade competition

2. Cost accounting aids price fixation

3. Cost accounting helps in making estimates

4. Cost accounting helps in channelizing production on right lines

etc.

(b) Costing as an Aid to Creditors

Investors, banks and other money lending institutions benefited immensely by the installation of an efficient system of costing.

(c) Costing as an Aid to Employees

Employees are benefited, through continuous employment and higher remuneration by way of incentives, bonus plans, etc.

(d) Costing as an Aid to National Economy

The overall economic development of a country takes place as a consequence of an increase in efficiency of production. Control of costs, elimination of wastages and inefficiencies led to the progress of the industry and, in consequence, the nation as a whole.

METHODS OF COST ACCOUNTING

1. Historical (or Conventional) Costing

This system is useful only for determining costs, but not useful for exercising any control over costs. It can serve as a guidance for future production only when conditions continue to be the same in future.

Using the historical cost convention, what would be the net book value of the machine today?

Solution

Net book value = Cost — Accumulated Depreciation

= $10,000 — ($10,000 x 5/10)

= $5,000

The machine would be assigned a historical cost of $10,000. The replacement value (i.e. $40,000) and fair value (i.e. $6,000) would not be considered in the valuation.

2. Standard Costing

It uses ratios to check the utilization of labor and goods to produce goods in a standard environment. Actual costs are compared with the predetermined costs and deviations known as variances are noted down. Thereafter, the reasons for the variances are ascertained and necessary steps are taken to prevent their recurrence.

Standard Cost = Material Cost + Direct Labour + Manufacturing Overhead

3. Marginal Costing

It refers to the ascertainment of marginal costs by differentiating between fixed costs and variable costs and the effect on profit of the changes in volume or type of output. In this case, only the variable costs are charged to products or operations while fixed costs are charged to the profit and loss account of the period in which they arise.

Marginal Cost = Change in Total Cost / Change in Quantity

4. Uniform Costing

A technique where standardized principles and methods of cost accounting are employed by a number of different companies and firms, is termed as uniform costing. This helps in comparing performance of one firm with that of another.

5. Direct Costing

The practice of charging all direct costs to operations, processes or products leaving all indirect costs to be written off against profits in the period in which they arise, is termed as direct costing.

6. Absorption Costing

The practice of charging all costs both variable and fixed to operation, process or products or process is termed as absorption costing.

7. Activity Based Costing

Activity-Based Costing (ABC) is a method of assigning the organization’s resource costs through activities to the products and services provided to its customers. It is defined as a technique of cost attribution to cost units on the basis of benefits received from indirect activities, e.g. ordering, setting up, assuring quality

ABC principles are used:

(i) to focus management attention on the total cost to produce a product or service

(ii) as the basis for full cost recovery. Support services are particularly

suitable for activity-based resourcing because they produce identifiable and

measurable units of output.

COST ACCOUNTING STANDARDS

Cost Accounting Standards have been developed by the Cost Accounting Standards Board (CASB) keeping in view legal developments. While formulating the Standards, the CASB takes into consideration the applicable laws, usage, and business environment prevailing in India. CASB also gives due consideration to the Cost Accounting Standards, principles and practices being followed by the other countries in the world.

The Institute/Board has so far issued 24 Cost Accounting Standards, Generally Accepted Cost Accounting Principles, 9 Guidance Notes on Cost Accounting Standards and two Guidance Notes on “Treatment of Costs Relating to Corporate Social Responsibility (CSR) Activities” and “Maintenance of Cost Accounting Records for Construction Industry Including Real Estate and Property Development Activity”.

Find all 24 standards at https://www.taxgyata.com/cost-accounting-standards/

CONCLUSION

Cost Accounting Helps Businesses Accurately Ascertain Costs.
Cost Accounting Can Improve Cost-Efficiency.
Cost Accounting Forms the Foundation of an Effective Budget Plan.
Cost Accounting Can Inform Better Decision Making.
Cost Accounting Can Guide Pricing.

Cost accounting will not be suitable for small scaled units as the returns will be lesser than the expenses of the unit. Cost accounting can only determine the cost of production but the cost of finance is totally overlooked in this system and while using cost accounting a lot of data has to be borrowed from the past and it can be quite full of errors and the cost found out might be the approximate value and not the actual value of the costs.