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Cost Accounting

As compared to the financial accounting, the focus of cost accounting is different. In the modern days of cut throat competition, any business organization has to pay attention towards their cost of production. Computation of cost on scientific basis and thereafter cost control and cost reduction has become of paramount importance. Hence it has become essential to study the basic principles and concepts of cost accounting. These are discussed in the subsequent paragraphs.

Cost

Cost can be defined as the expenditure (actual or notional) incurred on or attributable to a given thing. It can also be described as the resources that have been sacrificed or must be sacrificed to attain a particular objective. In other words, cost is the amount of resources used for something which must be measured in terms of money. For example – Cost of preparing one cup of tea is the amount incurred on the elements like material, labor and other expenses, similarly cost of offering any services like banking is the amount of expenditure for offering that service. Thus cost of production or cost of service can be calculated by ascertaining the resources used for the production or services.

Costing

Costing may be defined as ‘the technique and process of ascertaining costs’. According to Wheldon, ‘Costing is classifying, recording, allocation and appropriation of expenses for the determination of cost of products or services and for the presentation of suitably arranged data for the purpose of control and guidance of management. It includes the ascertainment of every order, job, contract, process, service units as may be appropriate. It deals with the cost of production, selling and distribution.

If we analyze the above definitions, it will be understood that costing is basically the procedure of ascertaining the costs. As mentioned above, for any business organization, ascertaining of costs is must and for this purpose a scientific procedure should be followed. ‘Costing’ is precisely this procedure which helps them to find out the costs of products or services.

Cost Accounting

Cost Accounting primarily deals with collection, analysis of relevant of cost data for interpretation and presentation for various problems of management. Cost accounting accounts for the cost of products, service or an operation. It is defined 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’.

Cost Accountancy

Cost Accountancy is a broader term and is defined as, ‘the application of costing and cost accounting principles, methods and techniques to the science and art and practice of cost control and the ascertainment of profitability as well as presentation of information for the purpose of managerial decision making.’

If we analyze the above definition, the following points will emerge,

Cost accounting is basically application of the costing and cost accounting principles.

This application is with specific purpose and that is for the purpose of cost control, ascertainment of profitability and also for presentation of information to facilitate decision making. Cost accounting is a combination of art and science, it is a science as it has well defined rules and regulations, it is an art as application of any science requires art and it is a practice as it has to be applied on continuous basis and is not a onetime exercise.

Objectives of Cost Accounting

Objectives of Cost Accounting can be summarized as under

To ascertain the cost of production on per unit basis, for example, cost per kg, cost per meter, cost per liter, cost per ton etc.

Cost accounting helps in the determination of selling price. Cost accounting enables to determine the cost of production on a scientific basis and it helps to fix the selling price.

Cost accounting helps in cost control and cost reduction.

Ascertainment of division wise, activity wise and unit wise profitability becomes possible through cost accounting.

Cost accounting also helps in locating wastages, inefficiencies and other loopholes in the production processes/services offered.

Cost accounting helps in presentation of relevant data to the management which helps in decision making. Decision making is one of the important functions of Management and it requires presentation of relevant data. Cost accounting enables presentation of relevant data in a systematic manner so that decision making becomes possible.

Cost accounting also helps in estimation of costs for the future.

Essentials of a good Costing system

For availing of maximum benefits, a good costing system should possess the following characteristics.

Costing system adopted in any organization should be suitable to its nature and size of the business and its information needs.

A costing system should be such that it is economical and the benefits derived from the same should be more than the cost of operating of the same.

Costing system should be simple to operate and understand. Unnecessary complications should be avoided.

Costing system should ensure proper system of accounting for material, labor and overheads and there should be proper classification made at the time of recording of the transaction itself.

Before designing a costing system, need and objectives of the system should be identified.

The costing system should ensure that the final aim of ascertaining of cost as accurately possible should be achieved.

Certain Important Terms

It is necessary to understand certain important terms used in cost accounting.

Cost Center

Cost Center is defined as, ‘a production or service, function, activity or item of equipment whose costs may be attributed to cost units. A cost center is the smallest organizational sub unit for which separate cost allocation is attempted’. To put in simple words, a cost center is nothing but a location, person or item of equipment for which cost may be ascertained and used for the purpose of cost control. For example, a production department, stores department, sales department can be cost centers. Similarly, an item of equipment like a lathe, fork-lift, truck or delivery vehicle can be cost center, a person like sales manager can be a cost center. The main object of identifying a cost center is to facilitate collection of costs so that further accounting will be easy. A cost center can be either personal or impersonal, similarly it can be a production cost center or service cost center. A cost center in which a specific process or a continuous sequence of operations is carried out is known as Process Cost Center.

Profit Center

Profit Center is defined as, ‘a segment of the business entity by which both revenues are received and expenses are incurred or controlled’. (CEMA) A profit center is any sub unit of an organization to which both revenues and costs are assigned. As explained above, cost center is an activity to which only costs are assigned but a profit center is one where costs and revenues are assigned so that profit can be ascertained. Such revenues and expenditure are being used to evaluae segmental performance as well as managerial performance. A division of an organization may be called as profit center. The performance of profit center is evaluated in terms of the fact whether the center has achieved its budgeted profits. Thus the profit center concept is used for evaluation of performance.