 |
| Image by - Pixabay.Com |
Cost Accounting System
Or
Product Costing System
or
Costing System
A
cost accounting system (also called product
costing system or costing system)
There
are different costing systems used in practice. These are described below.
Related Articles
👆 Methods and Techniques of Costing
Historical
Costing
In
this system, costs are ascertained only after they are incurred and that is why
it is called as historical costing system. For example, costs incurred in the
month of April, 2007 may be ascertained and collected in the month of May. Such
type of costing system is extremely useful for conducting post-mortem
examination of costs, i.e. analysis of the costs incurred in the past.
Historical costing system may not be useful from cost control point of view but
it certainly indicates a trend in the behavior of costs and is useful for
estimation of costs in future.
Absorption
Costing
In
this type of costing system, costs are absorbed in the product units irrespective
of their nature. In other words, all fixed and variable costs are absorbed in
the products. It is based on the principle that costs should be charged or
absorbed to whatever is being costed, whether it is a cost unit, cost center.
Marginal Costing
In
Marginal Costing, only variable costs are charged to the products and fixed
costs are written off to the Costing Profit and Loss A/c. The principle
followed in this case is that since fixed costs are largely period costs, they
should not enter into the production units. Naturally, the fixed costs will not
enter into the inventories and they will be valued at marginal costs only.
Uniform Costing
This
is not a distinct method of costing but is the adoption of identical costing
principles and procedures by several units of the same industry or by several
undertakings by mutual agreement. Uniform costing facilitates valid comparisons
between organizations and helps in eliminating inefficiencies.
Classification
of Costs
An
important step in computation and analysis of cost is the classification of costs
into different types. Classification helps in better control of the costs and
also helps considerably in decision making. Classification of costs can be made
according to the following basis.
Classification
according to elements
Costs
can be classified according to the elements. There are three elements of
costing, viz. material, labor and expenses. Total cost of production/ services
can be divided into the three elements to find out the contribution of each
element in the total costs.
Classification
according to nature
As
per this classification, costs can be classified into Direct and Indirect.
Direct costs are the costs which are identifiable with the product unit or cost
center while indirect costs are not identifiable with the product unit or cost
center and hence they are to be allocated, apportioned and then absorb in the
production units. All elements of costs like material, labor and expenses can
be classified into direct and indirect. They are mentioned below.
Direct and
Indirect Material: - Direct
material is the material which is identifiable with the product. For example, in
a cup of tea, quantity of milk consumed can be identified, quantity of glass in
a glass bottle can be identified and so these will be direct materials for
these products. Indirect material cannot be identified with the product, for
example lubricants, fuel, oil, cotton wastes etc cannot be identified with a
given unit of product and hence these are the examples of indirect materials.
Direct and
Indirect Labor:- Direct
labor can be identified with a given unit of product, for example, when wages
are paid according to the piece rate, wages per unit can be identified.
Similarly wages paid to workers who are directly engaged in the production can
also be identified and hence they are direct wages. On the other hand, wages
paid to workers like sweepers, gardeners, maintenance workers etc are indirect
wages as they cannot be identified with the given unit of production.
Direct and
Indirect Expenses:- Direct
expenses refers to expenses that are specifically incurred and charged for
specific or particular job, process, service, cost center or cost unit. These
expenses are also called as chargeable expenses. Examples of these expenses are
cost of drawing, design and layout, royalties payable on use of patents,
copyrights etc, consultation fees paid to architects, surveyors etc. Indirect
expenses on the other hand cannot be traced to specific product, job, process,
service or cost center or cost unit. Several examples of indirect expenses can
be given like insurance, electricity, rent, salaries, advertising etc.
It should be
noted that the total of direct expenses is known as ‘Prime Cost’ while the
total of all indirect expenses is known as ‘Overheads’.
Classification according to behaviour
Costs can also be classified according to their behavior. This classification is explained below.
Fixed Costs: -
Out
of the total costs, some costs remain fixed irrespective of changes in the
production volume. These costs are called as fixed costs. The feature of these
costs is that the total costs remain same while per unit fixed cost is always
variable. Examples of these costs are salaries, insurance, rent ete
Variable Costs:-
These
costs are variable in nature, i.e. they change according to the volume
of production. Their variability is in the same proportion to the production.
For example, if the production units are 2,000 and the variable cost is Rs. 5
per unit, the total variable cost will be Rs. 10,000, if the production units
are increased to 5,000 units, the total variable costs will be Rs.
25,000, i.e. the increase is exactly in the same proportion of the production.
Another feature of the variable cost is that per unit variable cost remains
same while the total variable costs will vary. In the example given above, the
per unit variable cost remains Rs. 2 per unit while total variable costs
change. Examples of variable costs are direct materials, direct labor etc.
Semi-variable
Costs:- Certain
costs are partly fixed and partly variable. In other words, they contain the
features of both types of costs. These costs are neither totally fixed nor
totally variable. Maintenance costs, supervisory costs etc are examples of
semi-variable costs. These costs are also called as ‘stepped costs’.
Classification
according to functions
Costs can also be classified according to the functions/ activities. This classification can be done as mentioned below.
Production Costs:-
All
costs incurred for production of goods are known as production costs.
Administrative
Costs:- Costs
incurred for administration are known as administrative costs. Examples of these
costs are office salaries, printing and stationery, office telephone, office
rent, office insurance etc.
Selling and
Distribution Costs:- All
costs incurred for procuring an order are called as selling costs while all
costs incurred for execution of order are distribution costs. Market research
expenses, advertising, sales staff salary, sales promotion expenses are some of
the examples of selling costs. Transportation expenses incurred on sales,
warehouse rent etc are examples of distribution costs.
Research and
Development Costs:- In
the modern days, research and development has become one of the
important functions of a business organization. Expenditure incurred for this
function can be classified as Research and Development Costs.
Classification
according to time
Costs
can also be classified according to time. This classification is
explained below.
Historical Costs:-
These
are the costs which are incurred in the past, i.e. in the past year, past
month or even in the last week or yesterday. The historical costs are
ascertained after the period is over. In other words it becomes a post-mortem
analysis of what has happened in the past. Though historical costs have limited
importance, still they can be used for estimating the trends of the future,
i.e. they can be effectively used for predicting the future costs.
Predetermined
Cost:- These
costs relating to the product are computed in advance of production, on the basis
of a specification of all the factors affecting cost and cost data. Pre
determined costs may be either standard or estimated. Standard Cost is a
predetermined calculation of how much cost should be under specific working
conditions. It is based on technical studies regarding material, labor and
expenses. The main purpose of standard
cost is to have some kind of benchmark for
comparing the actual performance with the standards. On the other hand,
estimated costs are predetermined costs based on past performance and adjusted
to the anticipated changes. It can be used in any business situation or
decision making which does not require accurate cost.
 |
| Image by - Pixabay.Com |
Classification
of costs for Management decision making
One
of the important function of cost accounting is to present
information to the Management for the purpose of decision making. For decision
making certain types of costs are relevant. Classification of costs based on
the criteria of decision making can be done in the following manner
Marginal Cost:-
Marginal
cost is the change in the aggregate costs due to change in the volume of output by
one unit. For example, suppose a manufacturing company produces 10,000 units
and the aggregate costs are Rs. 25,000, if 10,001 units are produced the
aggregate costs may be Rs. 25,020 which means that the marginal cost is Rs. 20.
Marginal cost is also termed as variable cost and hence per unit marginal cost
is always same, i.e. per unit marginal cost is always fixed. Marginal cost can
be effectively used for decision making in various areas.
Differential
Costs:- Differential
costs are also known as incremental cost. This cost is the difference in total
cost that will arise from the selection of one alternative to the other. In
other words, it is an added cost of a change in the level of activity. This
type of analysis is useful for taking various decisions like change in the
level of activity, adding or dropping a product, change in product mix, make or
buy decisions, accepting an export offer and so on.
Opportunity Costs:-
It
is the value of benefit sacrificed in favor of an alternative course of
action. It is the maximum amount that could be obtained at any given point of
time if a resource was sold or put to the most valuable alternative use that
would be practicable. Opportunity cost of goods or services is measured in
terms of revenue which could have been earned by employing that goods or
services in some other alternative uses.
Relevant Cost:-
The
relevant cost is a cost which is relevant in various decisions of management.
Decision making involves consideration of several alternative courses of
action. In this process, whatever costs are relevant are to be taken into
consideration. In other words, costs which are going to be affected matter the
most and these costs are called as relevant costs. Relevant cost is a future
cost which is different for different alternatives. It can also be defined as
any cost which is affected by the decision on hand. Thus in decision making
relevant costs play a vital role.
Replacement Cost:-
This
cost is the cost at which existing items of material or fixed assets
can be replaced. Thus this is the cost of replacing existing assets at present
or at a future date.
Abnormal Costs :-
It is an unusual or a typical cost whose occurrence is usually not regular
and is unexpected. This cost arises due to some abnormal situation of
production. Abnormal cost arises due to idle time, may be due to some
unexpected heavy breakdown of machinery. They are not taken into consideration
while computing cost of production or for decision making.
Controllable
Costs:- In
cost accounting, cost control and cost reduction are extremely important.
In fact, in the competitive environment, cost control and reduction are the key
words. Hence it is essential to identify the controllable and uncontrollable
costs. Controllable costs are those which can be controlled or influenced by a
conscious management action. For example, costs like telephone, printing
stationery etc can be controlled while costs like salaries etc cannot be
controlled at least in the short run. Generally, direct costs are controllable
while uncontrollable costs are beyond the control of an individual in a given
period of time.
Shutdown Cost:-
These
costs are the costs which are incurred if the operations are shut down
and they will disappear if the operations are continued. Examples of these
costs are costs of sheltering the plant and machinery and construction of sheds
for storing exposed property. Computation of shutdown costs is extremely
important for taking a decision of continuing or shutting down operations.
Capacity Cost:-
These
costs are normally fixed costs. The cost incurred by a company for providing
production, administration and selling and distribution capabilities in order
to perform various functions. Capacity costs include the costs of plant,
machinery and building for production, warehouses and vehicles for distribution
and key personnel for administration. These costs are in the nature of
long-term costs and are incurred as a result of planning decisions.
Urgent Costs:- These costs are those which must be incurred in order to continue operations of the firm. For example, cost of material and labor must be incurred if production is to take place.
No comments:
Post a Comment