INTRODUCTION TO COST ACCOUNTING

ACCOUNTING

FUNCTIONS OF ACCOUNTING
CLASSIFYING- The transaction from journal are classified and posted to Ledger

The actual record making phase (i.e. recording, classifying and summarizing) of accounting is called book-keeping. Accounting is concerned with the use to which these records are put, their analysis and interpretation. Accounting is wider term and includes the recording, classifying and summarizing of business transaction in term of money, the preparation of financial reports, the analysis and interpretation of these reports for the information and guidance to management

RCORDING-All financial transaction into journal

SUMMARIZING- Prepare trial balance and final accounts to know financial position of firm.

ANAYSIS AND INTERPRETATION-To calculate various ratios and percentage in order to evaluate past performance and make future plans

COMMUNICATION- All information should be presented in form of reports to management for decision-making.

OBJECTIVE OF ACCOUNTING

OBJECTIVE OF ACCOUNTING
TO ASCERTAIN WHETHER THE BUSINESS OPERATIONS HAVE BEEN PROFITABLE OR NOT

TO ASCERTAIN FINANCIAL POSITION OF THE BUSINESS

TO GENERATE INFORMATION TO FACILITATE PLANNING, CONTROL AND DECISIONMAKING

ADVANTAGE OF ACCOUNTING
Replacement of memory. Evidence in court. Settlement of tax liability. Comparative study. Sale of business Assistance to insolvent person Assistance to various interested parties

LIMITATION OF ACCOUNTING
Effect of price level is not considered No realistic information Personal bias of Accountant Permit alternative treatment

Historical in nature

BRANCHES OF ACCOUNTING

FINANCIAL ACCOUNTING

This branch of accounting is concerned with ascertainment of profit or loss during a specific period, to show financial position of business on particular date. To impart such information to outsider.

COST ACCOUNTING

This branch of accounting is concerned with ascertainment of cost relating to various activities of the business and to have cost control. To provide cost data for the use of management in controlling current operations and planning for future.

MANAGEMENT ACCOUNTING

This branch of accounting is concerned with providing accounting information that is useful to management. To provide accounting information to management for planning , controlling and decision making.

Financial accounting
The American Institute of Certified Public Accountant has defined the Financial Accounting as the art of recording, classifying and summarizing in significant manner in terms of money transaction and events which in part, at least of a financial character and interpreting result there of . Financial Accounting is science and art of recording and classifying business transaction and preparing summaries for determining year end profit or loss and the financial position of concern.

LIMITATIONS OF FINANCIAL ACCOUNTING

The Financial accounting is concerned with preparation of final accounts, i.e., Profit and Loss Account and Balance Sheet. The management needs information for planning , controlling and decision making. It is because of limitation of financial accounting that cost accounting and management accounting is developed.

Historical Nature- Financial accounting is mainly historical and tells about the cost already incurred. It does not provide day-to-day cost information to management. Not helpful in fixation of price- In financial accounting cost are not available as an aid in determining prices of products, services, production order and line of products. Provide information about the concern as whole- The information is not recorded product-wise, process-wise, department-wise and activity-wise so as to be helpful in cost determination and cost control. No classification of Expense and accounts-In Financial accounting, there is no classification of cost by department, process, product etc. There is no classification of direct and indirect cost.

No control over cost- It does not provide proper control of material and supplies, wages, labor and overheads. No analysis of loss- It does not provide complete analysis of losses due to defective material, idle time, idle plant and equipments. Inadequate information for reports- It does not provide adequate information for report to outside agencies such as bank, government, insurance and trade associations. No answer to certain questionsShould attempt be made to sell more or is factory operating to capacity? If order or contract is accepted, is price obtainable sufficient to show profit? If machine is purchased to carry out a job, at present done by hand, what will be effect on profit?

MANAGEMENT ACCOUNTING
Management accounting is the presentation of accounting information in such a way as to assist management in creation of policy and day-to-day operation of a business firm. Thus, it relate to the use of accounting data collected with help of financial accounting and cost accounting for the purpose of policy formation, planning, control and decision making. Management Accounting is concerned with accounting information that is useful to management---- R. N. ANTHONY

COST ACCOUNTING
The term cost has wide variety of meanings. Different people use this term in different senses for different purposes. For example, while buying a book, you generally ask, how much does it cost? Here cost means price. But in management terminology, the term cost refer to expenditure and not the cost.
According to Institute of cost and Management Accountants, London defines cost as the amount of expenditure incurred on or attributable to a given thing. DEFINITION OF COST ACCOUNTING Wheldon defines Cost Accounting as Cost Accounting is the application of accounting and costing principles, methods and techniques in the ascertainment of costs and analysis of saving/ or excess cost incurred as compared with previous experience or with standards. Cost accounting is concerned with collection, classification, ascertainment of cost and its accounting and control relating to various element of cost. It establishes budgets and standard cost and actual cost of operations, processes, department or products and analysis of variances, profitability and social use of funds.

CHARACTERISTICS OF COST ACCOUNTING

It is process of accounting for cost It records income and expenditure relating to production of goods and services It provide statistical data on the basis of which future estimates are prepared. It is concerned with cost ascertainment , cost control and cost reduction. It establishes budgets and standards, so that actual cost can be compared to find out the deviations It involves the preparation of right information to right person at right time so that it may be helpful to management for planning, evaluation of performance, control and decision making.

SCOPE OF COST ACCOUNTING

COST ASCERTAINMENT- It deals with collection and analysis of expense, the measurement of production of the different products at different stages of manufacture and linking up production with expenses. For this purpose different technique of costing such as Marginal costing, Total cost technique , direct cost technique is used.

COST ASERTAINMENT

COST ACCOUNTING

COST CONTROL

SCOPE OF COST ACCOUNTING

COST ACCOUNTING- It is a process of accounting for cost which begins with recording of expenditure and ends with preparation of statistical data.

COST ASERTAINMENT

COST CONTROL- It aims at guiding the actual performance towards the targets, regulates the actuals if they deviate. The cost can be controlled by standard costing, budgetary control , cost audit etc.

COST ACCOUNTING

COST CONTROL

OBJECTIVES OF COST ACCOUNTING TO ASCERTAIN COST- with the help of cost accounting, cost per unit of product, job or process is calculated. For calculating cost, various method such as unit costing, job costing, contract costing is used. COST CONTROL- cost control is reducing the cost of production by controlling the wastage of material, labor and other expenses. It help to improve the efficency of organization. DETERMINATION OF SELLING PRICE- Cost accounting has the main object to help in fixation of selling price of product or services.

OBJECTIVES OF COST ACCOUNTING

ASCERTAINMENT OF PROFITABILITY- Profitability means capacity to earn profit of department, section, product, job, process etc. This capacity can be judged with help of cost data provided by cost accounting. PROVIDES A BASE FOR SETTING BUSINESS POLICIES- Cost accounting helps to provide accurate cost information. These cost data help the management in setting short-term and longterm policies. CONTROL ON WASTAGE- Cost accounting can explain the sources of wastage in the element of cost and thus control them. INTER-FIRM COMAPARISON- Cost accounting helps in making comparisons of cost or profit of one firm with another operating in same industry EFFECTIVE INFORMATION SYSTEM-The objective of costing is to prepare regular repots on elements of cost and to communicate those report to management .

COST MANAGEMENT

The techniques and process of ascertaining cost involve three steps (i) Collection of expenditure or cost data, (iii) Classification of expenditure as per cost elements, function, etc. and (iii) Allocation and apportionment of expenditure to the cost centres and cost units.

COST MANAGEMENT

Collection of cost data

Allocation and apportionment of cost

Classification of cost as per cost element, functions

FINACIAL ACCOUNTING VS COST ACCOUNTING

Point of Distinction Purpose Financial Accounting Its main purpose is to ascertain profit and loss and financial position of business. It classifies, record and analyses the transaction in subjective manner i.e. according to nature of expense. It lay emphasis on recording aspect. Cost Accounting Its main purpose is to ascertain cost and cost control. It records the expenditure in objective manner i.e. according to purpose for which the cost are incurred. It provides a detailed system of control for labor, material and overhead cost with help of control technique.

Recording

Control

Periodicity of reporting
Reporting

It reports operating result and financial position usually at the end of year
Aims at external reporting to shareholders, government, investors, other partied

It provide information through cost reports to management as and when desired.

Aims at internal reporting to managers for controlling and decision-making.

Point of Distinction Reporting of costs

Financial Accounting Cost are reported in aggregates in financial accounts. The information is provided in monetary terms.

Cost Accounting The cost are broken on down on a unit basis in cost accounts. The information is both monetary and nonmonetary(units, job, contract etc.) Provide sufficient information for fixation of selling price Valued at cost . Disclose the efficiency as records of the productivity of each worker, cost centre, plant etc Maintenance is voluntary except in certain industries where companies act permit.

Information

Fixing of selling price

No fixation of Selling price

Stock valuation Disclosure of relative efficiency

Valued at cost or market price which ever is lower Fail to create difference between efficiency and inefficiency of worker, cost centre, plant etc Compulsory under companies act.

Maintenance of accounts optional/mandatory

COST ACCOUNTING VS MANAGEMENT ACCOUNTING

Point of distinction Cost accounting Purpose It deals with ascertainment, allocation and accounting aspect of cost Management accounting It deals with providing accounting information useful to management.

Base/ Derivation of Provide base for It is derived from both cost and data management accounting. It financial accounting is derived from financial accounting. Scope Does not include financial accounting, tax planning and accounting Include Financial accounting, cost accounting, tax planning and accounting

Planning Aspect Tools and technique

Concerned with short-term Concerned with short-term and planning long-term planning Cost account have greater application of standard costing, differential costing, and budgetary control Management accounting in addition to tools of cost accounting apply other tools such as Fund flow statement, cash flow statement, ratio analysis.

Point of distinction
Installation of system

Cost accounting
It can be installed without the help of management accounting system.

Management accounting
It cannot be installed without proper cost and financial accounting system.

Status of accountant The status of cost accountant comes after management account.

Management accountant is senior in position to cost accountant.

ADVANTAGE OF COST ACCOUNTING Profitable and unprofitable activities are disclosed and steps are taken to reduce unprofitable activities It enable a concern to measure the efficiency and then to maintain and improve it. It provide information upon which estimates and tenders are based. It guide further production policies. It helps in increasing profits. The exact cost of increase or decrease in profit or loss can be detected. It discloses relative efficiencies of different workers and thereby facilitates introduction of suitable plans for wage payment to reward efficiency. It is helpful to government. It is helpful to customer.