COST ACCOUNTING

DEFINITION 1.Cost: The terminology of management accounting has defined cost as the amount of expenditure incurred on, or attributable to, a specified thing or activity 2. Costing: This means classifying , recording and appropriate allocation of expenditure for the determination of the costs of the costs of goods or services and presentation of suitably arranged data for suitably arranged data for the purpose of control and guidance of the management . costing is tracing the cost to the user point 3.Cost Accounting: Cost accounting is defined as the process of accounting for cost which begins with the recording of income and expenditure or the basis on which they are calculated and ends with the preparation of periodical statements and reports for ascertaining and controlling costs. 4. Cost Reporting: After ascertaining cost it is reported to the management t the figure may be presented to the management in the firms of accounts or statistic management can then use the figures for various purposes.

THE DIFFERENCE BETWEEN COST ACCOUNTING AND FINANCIAL ACCOUNTING ARE AS

FOLLOWS:

Cost Accounting:
y

The main purpose of cost accounting is to analyse, ascertainment and control of cost. Cost accounting presents cost information at frequent intervals. Cost accounting generally kept voluntarily to meet the requirements of the management. Cost accounting records transactions in a objective manner. It means the purpose for which the cost in incurred. Financial Accounting: The main purpose of financial accounting is to record financial transactions, finding out profit or loss and financial position. Financial accounting presents financial information at the end of the accounting period.

Financial accounting is kept compulsory in such a way as to meet the requirement of the Companies Act and income Tax Act. Financial accounting records transactions in a subjective manner. It means according to the nature of expenses.

ADVANTAGES OF A COST ACCOUNTING SYSTEM MAY BE LISTED AS BELOW : 1. A good Cost Accounting System helps in identifying unprofitable activities, losses or inefficiencies in any form. 2. The application of cost reduction techniques, operations research techniques and value analysis technique, helps in achieving the objective of economy in concern's operations. Continuous efforts are being made by the business organization for finding new and improved methods for reducing costs. 3. Cost Accounting is useful for identifying the exact causes for decrease or increase in the, profit/loss of the business. It also helps in identifying unprofitable products or product lines so that these may be eliminated or alternative measures may be taken. 4. It provides information and data to the management to serve as guides in making decisions involving financial considerations. Guidance may also be given by the Cost Accountant on a host of problems such as, whether to purchase or manufacture a given component, whether to

accept orders below cost, which machine to purchase when a number of choices are available. 5. Cost Accounting is quite useful for price fixation. It serves as a guide to test the adequacy of selling prices. The price determined may be useful for preparing estimates or filling tenders. 6. The use of cost accounting technique viz., variance analysis, points out the deviations from the predetermined level and thus demands suitable action to eliminate such deviations in future. 7. Cost comparison helps in cost control. Such a comparison may be made from period to period by using the figures in respect of the same unit of firms or of several units in an industry by employing uniform costing and inter-firm comparison methods. Comparison may be made in respect of costs of jobs, processes or cost centres. 8. A system of costing provides figures for the use of Government, Wage Tribunals and other bodies for dealing with a variety of problems. Some such problems include price fixation, price control, tariff protection, wage level fixation, etc. 9. The cost of idle capacity can be easily worked out, when a concern is not working to full capacity. 10. The use of Marginal Costing technique, may help the executives in taking short term decisions. This technique of costing is highly useful during the period of trade depression, as the orders may have to be accepted during this period at a price less than the total cost.

11. The marginal cost has linear relationship with production volume and hence in formulating and solving "Linear Programming Problems", marginal cost is useful.

OBJECTIVES OF COST ACCOUNTING There is a relationship among information needs of management, cost accounting objectives, and techniques and tools used for analysis in cost accounting. Cost accounting has the following main objectives to serve: 1. Determining selling price, 2. Controlling cost 3. Providing information for decision-making 4. Ascertaining costing profit 5. Facilitating preparation of financial and other statements. 1. Determining selling price The objective of determining the cost of products is of main importance in cost accounting. The total product cost and cost per unit of product are important in deciding selling price of product. Cost accounting provides information regarding the cost to make and sell product or services. Other factors such as the quality of product, the condition of the market, the area of distribution, the quantity which can be supplied etc., are also to

be given consideration by the management before deciding the selling price, but the cost of product plays a major role. 2. Controlling cost Cost accounting helps in attaining aim of controlling cost by using various techniques such as Budgetary Control, Standard costing, and inventory control. Each item of cost [viz. material, labour, and expense] is budgeted at the beginning of the period and actual expenses incurred are compared with the budget. This increases the efficiency of the enterprise. 3. Providing information for decision-making Cost accounting helps the management in providing information for managerial decisions for formulating operative policies. These policies relate to the following matters: (i) Determination of cost-volume-profit relationship. (ii) Make or buy a component (iii) Shut down or continue operation at a loss (iv) Continuing with the existing machinery or replacing them by improved and economical machines. 4. Ascertaining costing profit

Cost accounting helps in ascertaining the costing profit or loss of any activity on an objective basis by matching cost with the revenue of the activity.

5. Facilitating preparation of financial and other statements Cost accounting helps to produce statements at short intervals as the management may require. The financial statements are prepared generally once a year or half year to meet the needs of the management. In order to operate the business at high efficiency, it is essential for management to have a review of production, sales and operating results. Cost accounting provides daily, weekly or monthly statements of units produced, accumulated cost with analysis. Cost accounting system provides immediate information regarding stock of raw material, semi finished and finished goods. This helps in preparation of financial statements.

MARGINAL COSTING

THE PRINCIPLES OF MARGINAL COSTING 1. For any given period of time, fixed costs will be the same, for any volume of sales and production (provided that the level of activity is within the relevant range ). Therefore, by selling an extra item of product or service the following will happen. a) Revenue will increase by the sales value of the item sold. b) Cost will increase by the variable cost per unit.

c) profit will increase by the amount of contribution earned from the extra item 2.Similarly , if the volume of sales falls by one item , the profit will fall by the amount of contribution earned from the item 3.Profit measurement should therefore be based on analysis of total contribution. Since fixed costs related to a period of time , and do not change with increase or decrease in sales volume , it is misleading to charge units of sale with a share of fixed costs. 4. When a unit of product is made , extra costs incurred in its manufactured are the variable production costs. Fixed costs are unaffected, and no extra costs are incurred when output is increased

MEANING It is the amount by which total cost increases when one extra unit is produced, or the amount of cost which can be avoided by producing one unit less. Accordingly, marginal cost may also be defined as the variable cost incurred due to a specific activity. It is concerned with variable costs, because fixed costs by definition do not change with the volume produced.

FEATURES OF MARGINAL COSTING The main features of marginal costing are as follows: 1. Cost Classification The marginal costing technique makes a sharp distinction between variable costs and fixed costs. It is the variable cost on the basis of which production and sales policies are designed by a firm following the marginal costing technique.

2.Stock/Inventory Valuation Under marginal costing, inventory/stock for profit measurement is valued at marginal cost. It is in sharp contrast to the total unit cost under absorption costing method.

3.Marginal Contribution Marginal costing technique makes use of marginal contribution for marking various decisions. Marginal contribution is the difference between sales and marginal cost. It forms the basis for judging the profitability of different products or departments.

ADVANTAGES OF MARGINAL COSTING TECHNIQUE

1. Marginal costing is simple to understand. 2. By not charging fixed overhead to cost of production, the effect of varying charges per unit is avoided. 3. It prevents the illogical carry forward in stock valuation of some proportion of current years fixed overhead. 4. The effects of alternative sales or production policies can be more readily available and assessed, and decisions taken would yield the maximum return to business. 5. It eliminates large balances left in overhead control accounts which indicate the difficulty of ascertaining an accurate overhead recovery rate. 6. Practical cost control is greatly facilitated. By avoiding arbitrary allocation of fixed overhead, efforts can be concentrated on maintaining a uniform and consistent marginal cost. It is useful to various levels of management. 7. It helps in short-term profit planning by breakeven and profitability analysis, both in terms of quantity and graphs. Comparative profitability and performance between two or more products and divisions can easily be assessed and brought to the notice of management for decision making.

LIMITATIONS OF MARGINAL COSTING ARE AS FOLLOWS:

(i) The technique is based on the segregation of costs into fixed and variable ones, while many expenses are neither totally fixed nor totally variable at various levels of activity. Thus, classifying all expenses into two categories of either fixed or variable is a difficult task

(II)

The assumptions regarding behavior of costs, such as, fixed cost remains static, are often not realistic.

(III) Contribution is not the only index to take decisions. For example, where fixed cost is very high, selling price should not be fixed on the basis of contribution alone without considering other key factors such as capital employed.

(IV) Marginal cost, if confused with total cost while fixing selling price may lead to a disaster.

(V)

Inventory valuation at marginal cost will understate profits and may not be acceptable by tax-authorities. Any claim based on cost will be very low, as it will not have a share of fixed cost.