The meanings, goals, principles, objections against and progress of cost accounting are discussed in this section.
Cost Accounting Meaning
Cost accounting is the process of classifying, recording, and allocating expenditures in order to calculate product or service costs as well as the presentation of suitably arranged data for purposes of management control and guidance. It includes determining the cost of each purchase order, job, contract, procedure, service, or unit as needed. It covers production costs as well as selling and distribution expenses.
It is for this purpose that such analysis and classification of expenditure are required so as to determine the total cost of any specific unit of production or service with reasonable accuracy while also revealing how such total cost is formed (i.e. the value of material utilized, the amount of labour and other expenses incurred), in order to regulate and minimize its expense.
According to Wheldon, “Cost accounting is the application of accounting and costing principles, methods and techniques in the ascertainment of costs and the analysis of saving/or excess cost incurred as compared with previous experience or with standards”. Cost accounting, therefore, entails the gathering, classifying, determining of cost and its accounting and control with respect to the various components of cost.
The primary objective of the financial statement is to provide a framework for analyzing company performance and decision-making.
Cost Of Accounting Features
- It’s the act of calculating expenditures.
- Business expense and income are recorded by the company.
- It provides statistical data in the form of which future estimates and quotations are made.
- It focuses on determining the cost of goods and services, as well as controlling and lowering costs.
- The city of Bekasi has used a productivity, evaluation, and management system since the mid-2000s.
- It establishes budgets and criteria that enable actual expenditures to be compared with each other to detect any departures or variances.
- It entails delivering correct information to the proper person at the proper time in order for it to be of assistance to management in planning, evaluating performance, controlling, and making decisions.
Difference between Costing and Cost Accounting
Main differences between costing and cost accounting are given as under:
Objectives of Cost Accounting
The objectives of cost accounting are the determination of costs, the setting of selling prices, proper recording and presentation of cost data to management for measuring efficiency and for cost control and reduction, determining the profit from each activity, assisting management in decision making and determining break-even point.
The purpose is to understand how costs of goods, services, and overhead are recorded, classified, and allocated so that the cost of items and services may be accurately determined; these expenses may then be correlated to sales and profitability can be calculated. With the development of business and industry, however, its goals are changing on a daily basis.
Following are the main objectives of cost accounting
- To determine the cost per unit of a company’s various products
- To compute a correct cost analysis by process or operation as well as by different elements of cost;
- To reveal sources of waste, whether in the form of materials, time or money, as well as to prepare such reports as might be required to minimize wastage;
- To collect data and offer a reference for fixing prices for items manufactured or services provided;
- Assessing the profitability of each product and suggesting to management how these earnings might be enhanced is a typical procedure.
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- To expose savings opportunities by tracking material, labor, and overhead costs with a system of cost control;
- Assist management in assessing future expansion opportunities and capital projects;
- To develop and evaluate management indicators and plans, analyze performance, and assess control;
- To assist in the creation of budgets and financial management;
- To develop an effective information system that allows various levels of management to acquire the correct data in the right format at the appropriate time for carrying out their specific tasks effectively;
- To advise management on the creation and implementation of incentive bonus plans based on productivity and cost savings;
- To give relevant information to management for making financial judgments such as the introduction of new goods, the replacement of human labor by machine, and so on;
- To help with the management of punched card accounting or computerized data processing
- To establish an internal audit system that works for several departments;
- To collaborate with departmental executives to run cost-cutting initiatives
- To prevent errors and frauds, and to provide timely and accurate information to management, we will offer bespoke services of cost audit.
- Identify the costs of those goods or services acquired by selling which the revenues have resulted, and find out how much money you make or lose.
Broadly speaking, the above objectives can be re-grouped under the following three heads:
- Analysis and assessment of cost and income by product, function, and responsibility.
- There are several techniques for varying the costs of a project.
- For example, when comparing two options, you can use the cost calculator in PowerPoint to calculate the likely result of one option over another and then choose your best option based on that calculation.
- Another technique is to change an element from one stage to the next without replacing it completely so as not to alter quality or cause any difficulties with supplies chains.
- This technique is implemented through controlling and managing cost data in order to minimize expenditures as much as feasible while maintaining quality.
- The goal of this objective is achieved by fixing targets, verifying actuals, comparing actuals with goals, analyzing causes of variances between actuals and objectives, and variations to management so they may take action.
- Making information available to management so that they may make informed decisions.
Objections Against Cost Accounting
Costs are often opposed for a variety of reasons when they are implemented.
Following are some of the important objections usually raised:
Want of Necessity
It has been claimed that costing is a modern invention that has benefited industries in the past and continues to do so, therefore adding a cost system would be an wasteful expenditure.
This argument ignores the reality that today’s industries operate in a highly competitive environment, and that every manufacturer must know the real cost of production in order to determine how far he can reduce the selling price. Many industrial failures may be attributed to a lack of knowledge on the part of producers regarding actual manufacturing costs and, as a result, selling items at a loss.
Many kinds of businesses are said to be unsuitable for the use of modern costing methods. It’s true that costing can’t be effectively applied to small- and medium-sized firms, but various techniques of costing may always be devised to fit the needs of a firm in many cases.
It should be emphasized that there is no typical costing method that may be used in all industries. The cost system should be developed to fit the company, not the other way around.
Failure in Many Cases
The adoption of a costing system, however, has been met with criticism. It is claimed that in many cases, the system has failed to deliver the intended benefits, thus proving to be inadequate. Management’s apathy or indifference, a lack of adequate infrastructure, employee non-cooperation or opposition are all possible reasons why a system may fail. As a result it is unwise to point fingers at the system if it fails to meet expectations.
Mere Matter of Forms and Rulings
After some time, a costing system is said to degrade into a question of forms and rules. It isn’t the system’s fault. It’s due to how the system is maintained. Forms and rulings are necessary for a costing system, but they must be updated and revised as conditions change. If this isn’t done, the system will inevitably degenerate into a collection of forms and regulations.
It is claimed that the expense of putting in and running a cost system greatly outweighs the advantages. It may be said, therefore, that a cost system must be a profitable investment and provide returns commensurate with the money spent on it. If you take the time to develop a costing system that fits your industry’s needs without going overboard,
General Principles of Cost Accounting
Following are the main principles of Cost Accounting:
For each item of cost, a cause-effect connection should be established. Each cost should be connected to its source as precisely as possible, and the influence of that expenditure on various departments should be determined. Only those units that travel through departments for which such expenditure has been incurred may share a cost.
Charge of Cost Only after its Incurrence
The unit cost should only include those expenses that have been actually spent. Unit costs should not be levied with selling costs, for example, until they have been incurred in the factory.
Past Costs Should not Form Part of Future Costs
Costs that have already been incurred should not be recovered from future costs since this would taint the genuine outcomes of future periods, as well as distort other claims.
Exclusion of Abnormal Costs from Cost Accounts
When considering a unit cost, any costs incurred as a result of abnormal circumstances (such as theft or carelessness) should not be considered. It will distort the cost data and mislead management if they are taken into consideration.
Principles of Double Entry Should be Followed Preferably
To reduce the chances of making a mistake or committing an error, cost ledgers and control accounts, to the greatest extent feasible, should be kept on double entry principles. This will assure that cost sheets and statements are accurate.
Evolution and Development of Cost Accounting
The introduction of cost accounting in the Western world during the last half of the nineteenth century was prompted by industrialization’s progression throughout much of Europe and North America. Cost accounting became necessary as a result of the factory system, which necessitated precise cost information for efficiency in production. Despite this, there was little progress in developing cost accounting during the Victorian era.
To quote Eldon S. Hendriksen, “Not until the last 20 years of the 19th century was there much literature on the subject of cost accounting in England and even then very little was to be found in the United States. Most of the literature until this time emphasized the procedures for the calculation of prime costs only.”
Several reasons for the late development of cost accounting can be attributed as given below:
- During the early phase of the factory system, indirect costs (i.e., overheads) were a minor component of overall cost since expensive equipment was uncommon at that time. If overheads account for a significant amount of total expenditure, necessity for cost accounting will be more apparent in our examination throughout the book.
- The secrecy that cost accountants maintained about their costing methods was also to blame for the slow growth of cost accounting.
- Manufacturing procedures were basic up until the late 19th and early 20th centuries, when companies started producing a few versions of goods. Development, cost accounting was also delayed as a result of these circumstances.
The most significant growth in cost accounting occurred after World War I, when huge industry and mass production technologies grew. When non-material costs (i.e., overheads) other than materials and labor formed a substantial portion of the overall cost of production, the scientific management movement sparked by Taylor gave favor to the development of cost accounting.
The advent of cost accounting in India is fairly new, and it gained importance after the country’s independence, when the Indian government placed a premium on national industrial growth. Furthermore, section 233 B of the Companies Act has given impetus to the development of cost accounting in India.
The Vivian Bose Inquiry Commission exposed a wide range of unscrupulous activities in the production sector, suggesting that the financial audit for the end-of-year financial account audit was insufficient to evaluate real manufacturing firm performance.
As a result, the notion of cost audit was devised to get the highest possible use of national resources in manufacturing firms and the government was granted the power to issue cost audits under Section 233B of the Companies Act, 1956.
The Government may appoint a cost auditor to conduct cost audit where it is necessary:
(a) To do so, according to the Government’s view under Section 233 B of the Companies Act, 1956;
(b) When the government is asked for protection or financial assistance, it’s crucial to know the true cost of certain goods.
(c) To figure out the actual price of a contract given to a private business on the ‘cost plus’ basis, you must first determine what factors have been considered when calculating cost;
(d) To prevent excessive profiteering, make sure that certain products of production have reasonable costs.