Cost accounting enables the management to take up re various strategic decisions like "Make or Buy", "Shut down or Continue", "Replace or Continue", " Status quo or ef Expansion" etc.
For eg: the technique of marginal costing helps the management in making various short term decisions. It is not an exact science and involves inherent element of judgement. Cost varies with purpose. Therefore cost collected for one purpose will not be suitable for another co purpose. Cost accounting presents the base for taking the best decisions. It does not give an outright solution. Most of the cost accounting techniques are based on some pre-assumed notions. There are different views held by different experts on the treatment of certain items of cost.
Expen ii. Labour Turnover , cost of recruitment and training of new employees. Sales Statement giving product wise break-up of unit realisation, volume achieved as against the targets. Inventory Analysis Sheet giving break-up of inventories into materials, work-in-progress and finished goods, their number of months holding as against the normal holding period in the industry. Any other report pertaining to any cost centre explained later.
A lot of problems can be nl avoided if the cost accounting system is introduced carefully. Before setting up a system llo of cost accounting, the under mentioned factors should be studied :. The objective of costing system i. Size of the organisation, general organisation of the business with a view to finding out the manner w on which the system could be introduced iii. Areas of functioning wherein the management's action will be most beneficial. The system of costing should be designed after a careful study of the management's polices and expectations.
Technical aspects of the business should be studied thoroughly by the designers. The maximum amount of information that would be sufficient and how the same should be secured without too much burden on the existing system of the organisation.
Forms standardisation - various forms to be used by costing system for various data collection and dissemination. The degree of accuracy of data to be supplied by m the system and how verification of such data can be brought about. Benefits of system to be explained - the manner in which the benefits of installation of the cost accounting system should be explained and how an e.
Information requirements of management, the nature of reports to be generated through the cost nl accounting system llo 3. Codification and classification w ii.
Establishment of cost centres w iii. Guidelines for separation of fixed and variable costs iv. Guidelines for allocation of indirect costs v. Introduction of standard formats vi. Specification of reports and their periodicity vii. Preparation of Cost Accounts Manual viii. Guidelines for post-installation appraisal of costing system 3. It should be simple and practical.
It should be tailor-made for the requirements of the organisation. The data to be used by the cost accounting system should be accurate or else the output will suffer.
The system of costing should not sacrifice the utility by introducing meticulous and unnecessary details. The cost of installation should justify the results. Active co-operation and participation of executives from different departments ensures in developing a good cost accounting system.
A carefully phased program should be prepared m by using network analysis for the introduction of the system. Following initial difficulties are likely to be experienced re when a new costing system is introduced : ef i.
Lack of support from other departmental heads ii. Resistance from accounting staff in iii. Non co-operation from the supervisory staff iv. Shortage of trained staff nl 4. He establishes a cost accounting department in w his concern. He ascertains the requirement of cost w information which may be useful to organisational managers at different levels of the hierarchy. He develops a manual, which specifies the functions to be performed by the cost accounting department.
The manual also contains the format of various forms which would be utilised by the concern for procuring and providing information to the concerned officers.
It also specifies the frequency at which the cost information would be supplied to a concerned executive. Usually, the functions performed by a cost accounting department includes -cost ascertainment, cost comparison, cost reduction, cost control and cost reporting. Cost ascertainment, requires the classification of costs into direct and indirect. Further it requires classification of indirect costs known as overheads into three classes viz.
Cost accountant suggests the basis which may be used by his subordinates for carrying out the m necessary classifications as suggested above. Cost comparison is the task carried out by cost co accountant for controlling the cost of the products manufactured by the concern. Cost accountant of the concern establishes standards for all the elements of e.
The standard cost so determined may be compared re with the actual cost to determine the variances. Cost accountant ascertains the reasons for the occurrence ef of these variances for taking suitable action.
Cost analysis may also be made by cost Accountant in for taking decisions like make or buy and for reviewing the current performance. Cost accountant also plays a key role in the preparation of cost reports. These reports help the llo executives of a business concern in reviewing their own performance and in identifying the weak areas, where enough control measures may be taken in. It helps to assess the overall progress of an organisation, its strength and weakness.
It facilitates effective control over the assets of the organisation. However, there are serious limitations of financial accountancy from the point of view of the management. It is on account of these limitations that "Costs Accounting" has been developed for the purpose of management control and internal m reporting.
Limitations of Financial Overcome By Cost Accounting Accounting re ef Forecasting and Planning in Financial accounts cannot provide Budget technique of cost information required for future planning. Which product mix is the most limitation. The management can profitable? When to shut down the activity? When will the break-even point incurred.
Cannot be facilitated by financial accounting. Thus the important limitations of financial accountancy namely, lack of analysis of data and absence of yardsticks is very well overcome by cost accountancy. In cost accounting, the main emphasis is on cost and e. Management re accountancy utilizes the principles and practices of financial accounting in addition to ef other modern management techniques for efficient operation of the organisation. Formulating strategy b.
Planning and controlling activities c. Decision making d. Optimising the use of resources e. Disclosure to shareholders and others external to the entity f.
Disclosure to employees g. Safeguarding assets". It represents the resources that have been or must be sacrificed to attain a particular objective. It is the planned cost of a product and is expected to be co achieved under a particular production process under normal conditions. It is often used as a basis for price fixing and cost control. It is based on past data adjusted to anticipated future changes. Difference in computation b.
Difference in emphasis. Difference in use d. Difference in records w e. Difference in applicability w 6. In other words, it is that cost which is not essential for the accomplishment of a particular objective. It does not vary with changes in output or with operational activities.
This cost has two important features : a. It arises from periodic usually annual decisions regarding the maximum outlay to be incurred m And b. This cost is not tied to a cause and effect relationship co between input and output. Thus, imputed cost is that cost which does not involve any cash outlay. Though it is a hypothetical cost, it is relevant for decision making.
Interest on capital, the. For e. If Mr. A suffers by foregoing employment in X Ltd. It is a short term cost concept and is used in short- term decision making like make or buy, price fixation during recession. Out of pocket cost can be avoided if a particular proposal under consideration is not accepted. All the non- co manufacturing costs like administrative, selling and distribution expenses are treated as period costs. This cost is not relevant in re decision making in the current period.
For eg. In the case of a decision relating to the replacement of a machine, the ef written down value of the existing machine is a sunk cost and hence irrelevant to decision making. Examples of committed llo cost are depreciation, insurance premium and rent. Examples of shut down cost are w depreciation and rent.
Cost centre is the smallest organisational sub-unit for which separate cost collection is attempted. It is defined as a location, a person or an item of equipment or group of these for which cost may be ascertained and used for the purpose of cost control.
Types - Primarily there are two types of cost centres, namely: m a. Personal cost centre - consisting of a person or a group of persons co b. Impersonal cost centre - consisting of a location or an item of equipment or a group of these. Functionally, there are two types of cost centres, namely: re a.
Production cost centre - It is a cost centre where both direct and indirect expenses are incurred for the ef production. Following are the examples of production cost centres- machine shop, milling and turning shop, in assembly shop. Service Cost Centre - A cost centre which renders nl services to production cost centres is termed as service cost centre.
It serves as an ancillary unit to llo the production cost centre. Powerhouse, boiler plant, repair shop, material service centre, all are examples of service cost.
Important w considerations for the formation of cost centres are as w follows: a. Organisation of the factory b. Conditions prevalent for incurrence of cost c. A cost unit is defined as a unit of quantity of product, service or time or a combination of these in relation to which costs may be ascertained or expressed. Cost units are usually units of physical measurement like number, weight, time, area, length, volume etc. For w example, if a worker is employed in department "A", then the wages paid to the worker are allocated or charged to w department "A".
Thus, one item of cost is charged to two or more cost centres or cost units. Normally overheads indirect costs are charged to cost centres or cost units by way of apportionment in proportion to the anticipated benefits. Note : Cost allocation Vs Cost apportionment. Thus cost absorption follows cost allocation and cost apportionment. Selection of correct method of overhead absorption is very important for pricing policies, tenders and other managerial decisions.
Overhead absorption is accomplished through overhead m rates. Thus, a responsibility centre is defined as an activity centre of a ef business organisation entrusted with a special task. Under modern nl budgeting and control, finance executives tend to apply the concept of responsibility centres for the purpose of llo control. Types -. Cost centres - Refer 6. Profit centres - Centres, which have the responsibility w of generating and maximising profits , are called profit centres.
Investment centres - Centres which are responsible for earning an optimum return on investments are termed as investment centres. Revenue centres - Centres which are devoted to raising revenue with no responsibility for production are called revenue centres. Sales centre. Contribution centres - Profit centres whose expenditure are reported on a marginal cost basis, are called contribution centres.
Direct Materials - Materials which are present in the finished product or can be identified in the finished product are called direct materials. Indirect Materials - Indirect materials are those materials which do not normally form part of the finished products or which cannot be directly traced to the finished product.
Direct Labour - Labour which can be attributed e. It is the labour utilised in converting re raw materials into finished products. Indirect Labour - Labour which cannot be identified with a particular product, process or job is called in indirect labour. Indirect labour cost is apportioned to cost units or cost centres. Direct Expenses - Expenses incurred except direct. They are w also called "chargeable expenses". Indirect Expenses - Expenses incurred other than direct expenses are called indirect expenses.
Most of the external financial aspects of the organization, e. Of course internal information is also prepared, but in general it can be said that financial accounting presents a broader, more overall view of the organization with primary emphasis upon classification according to type of transaction rather than the cost and management accounting emphasis on the function, activities, products and processes and on internal planning and control information.
Skip to content. Material Purchase and Storage. Overhead : Classifications, Overhead Accounting- allocation, apportionment, re-apportionment and absorption of Overheads. Process Costing : features, application of process costing, process losses-normal loss, abnormal loss and abnormal gain, inter-process profits and evaluation of different processes through practical problems.
Equivalent production in Process Costing : meaning, calculation of Equivalent production and evaluation of Equivalent production through practical problems, Joint Product and By- Product Costing. Some of the cost accounting questions and answers are mentioned below.
You can download the QnA in cost accounting pdf form. If you have already studied the cost accounting notes , then its time to move ahead and go through previous year cost accounting question paper. It will help you to understand question paper pattern and type of cost accounting question and answer asked in mba cost accounting exam.
Below is the list of cost accounting book recommended by the top university in India. Below is the top cost accounting book that can be bought from Amazon. The importance of cost accounting are as follows: 1. Importance to Management Cost accounting provides invaluable help to management. It is difficult to indicate where the work of cost accountant ends and managerial control begins.
The advantages are as follows : Helps in ascertainment of cost Cost accounting helps the management in the ascertainment of cost of process, product, Job, contract, activity, etc. Aids in Price fixation By using demand and supply, activities of competitors, market condition to a great extent, also determine the price of product and cost to the producer does play an important role. The producer can take necessary help from his costing records.
Helps in Cost reduction Cost can be reduced in the long-run when cost reduction programme and improved methods are tried to reduce costs.
Elimination of wastage As it is possible to know the cost of product at every stage, it becomes possible to check the forms of waste, such as time and expenses etc.
Helps in identifying unprofitable activities With the help of cost accounting the unprofitable activities are identified, so that the necessary correct action may be taken. Notes Helps in fixing selling Prices It helps the management in fixing selling prices of product by providing detailed cost information.
Helps in Inventory Control Cost furnishes control which management requires in respect of stock of material, work in progress and finished goods. Helps in estimate Costing records provide a reliable basis upon which tender and estimates may be prepared. Importance to Employees Worker and employees have an interest in which they are employed. An efficient costing system benefits employees through incentives plan in their enterprise, etc.
As a result both the productivity and earning capacity increases. They can base their judgement about the profitability and prospects of the enterprise upon the studies and reports submitted by the cost accountant. Importance to National Economy An efficient costing system benefits national economy by stepping up the government revenue by achieving higher production.
The overall economic developments of a country take place due to efficiency of production. Using budgetary control and standard costing, costing used to control material cost, labour cost, etc. Installation of an efficient costing system results in the increase in productivity and earnings capacity. Studies and reports submitted by the cost accountant enables judging the profitability and prospects of the enterprise.
It enables to check the wastage in term of time and expenses. These practices are not static but changing with time. Cost accounting lacks a uniform procedure. There is no stereotyped system of cost accounting applicable to all industries.
There are widely recognised cost concepts but understood and applied differently by different industries. Cost accounting can be used only by big enterprises. Preparation of reconciliation statements frequently is necessary to verify their accuracy. This leads to unnecessary increase in workload.
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