Cost Accounting

By
HIRA IDREES
ACCOUNTING

 ACCOUNTING IS AN ART OF RECORDING, CLASSIFYING, SUMMARIZING

FINANCIAL TRANSACTIONS AND INTERPRETING THE RESULTS TO END
USERS. ACCOUNTING CAN BE DIVIDED IN THREE BRANCHES INCLUDING
THE FOLLOWINGS
a) FINANCIAL ACCOUNTING
b) COST AND MANAGERIAL ACCOUNTING
c) Tax accounting
 COST ACCOUNTING
 COST ACCOUNTING IS A METHOD OF ACCOUNTING IN WHICH ALL COSTS THAT ARE INVOLVED IN
CARRYING OUT ANY ACTIVITY ARE COLLECTED, RECORDED AND SUMMARIZED. THE DATA IS BEING
ANALYZED TO ARRIVE AT A SELLING PRICE OR COST OF PRODUCT.  
 COST ACCOUNTING INVOLVES THE TECHNIQUES FOR;

1. DETERMINING THE COSTS OF PRODUCTS, PROCESSES, PROJECTS, ETC. IN

ORDER TO REPORT THE CORRECT AMOUNTS ON THE FINANCIAL
STATEMENTS

2. ASSISTING MANAGEMENT IN MAKING DECISIONS AND IN THE PLANNING

AND CONTROL OF AN ORGANIZATION.

 FOR EXAMPLE, COST ACCOUNTING IS USED TO COMPUTE THE UNIT COST OF A MANUFACTURER'S
PRODUCTS IN ORDER TO REPORT THE COST OF INVENTORY ON BALANCE SHEET AND COST OF
GOODS SOLD ON INCOME STATEMENT.
 DIFFERENCE BETWEEN COST ACCOUNTING AND
FINANCIAL ACCOUNTING

 THE OBJECTIVE OF FINANCIAL ACCOUNTING IS TO PROVIDE INFORMATION REGARDING FINANCIAL

POSITION AND FINANCIAL PERFORMANCE OF A COMPANY WHILE COST ACCOUNTING IS MEANT TO
PROVIDE INFORMATION REGARDING THE ASCERTAINMENT OF COST, CONTROLLING COST AND
MAKING DECISIONS REGARDING COST.
 FINANCIAL ACCOUNTING RECORDS HISTORICAL DATA WHILE COST ACCOUNTING ALSO PRESENTS
BUDGETED DATA.
 USERS OF FINANCIAL ACCOUNTING INFORMATION ARE SHAREHOLDERS, POTENTIAL INVESTORS,
CREDITORS AND GOVERNMENT ETC. WHILE COST ACCOUNTING USERS INCLUDE INTERNAL
MANAGEMENT
 FINANCIAL ACCOUNTING PRESENTS PROFIT/LOSS OF THE ORGANIZATION WHILE COST ACCOUNTING
PROVIDES DETAILS REGARDING COST AND PROFIT OF EACH PRODUCT, PROCESS OR JOB ETC.
 FINANCIAL STATEMENTS ARE PREPARED USUALLY AT THE END OF ACCOUNTING PERIOD WHILE COST
ACCOUNTING PREPARE REPORTS AND STATEMENTS WHEN REQUIRED BY MANAGEMENT
 FINANCIAL STATEMENTS ARE PREPARED USING A SET FORMAT WHILE IN COST ACCOUNTING THERE IS
NO STANDARD FORMAT FOR PREPARING COST ACCOUNTING REPORTS OR STATEMENTS.
SCOPE OF COST ACCOUNTING

 The scope of cost accounting is very wide. There are lots of techniques, tools, procedures,
processes; programs are used in cost accounting for calculating cost and its control. But
basically, we divide its scope within three major parts
SCOPE OF COST ACCOUNTING

1. COST ASCERTAINMENT

IN THIS REGION OF COST ACCOUNTING, COST ACCOUNTING COLLECTS PRODUCT'S MATERIAL,

LABOR AND OVERHEAD COST AND TRY TO CALCULATE TOTAL AND PER UNIT COST OF PRODUCT.
2. COST RECORDS

IN THIS PART OF COST ACCOUNTING, COST ACCOUNTANT MAINTAINS COST BOOKS, VOUCHERS,
LEDGERS, REPORTS AND OTHER COST RELATED DOCUMENTS FOR FUTURE COMPARISON AND
REFERENCE. IT WILL ALSO BE UNDER THE SCOPE OF COST ACCOUNTING. 
3. COST CONTROL

THIS IS THE END BOUNDARY OF COST ACCOUNTING SCOPE. IN THIS DIVISION, COST
ACCOUNTANT USED DIFFERENT TECHNIQUES AND METHODS FOR CONTROLLING THE COST.
COST ACCOUNTANT USES BUDGETARY CONTROL, STANDARD COSTING, BREAK EVEN POINT
ANALYSIS AND MANY OTHER TECHNIQUES FOR CONTROLLING THE COST.
USES OF COST ACCOUNTING
 IT HELPS IN OPTIMUM UTILIZATION OF MEN, MATERIAL AND MACHINES.
 COST ACCOUNTING IDENTIFIES THE AREAS THAT REQUIRE CORRECTIVE ACTION.
 IT HELPS MANAGEMENT IN THE FORMULATION OF POLICIES
 IT PROVIDES APPROPRIATE SOLUTION TO THE VARIOUS PROBLEMS OF
MANAGEMENT.
 COSTING HELPS MANAGEMENT IN MAKING SHORT TERM DECISIONS, BY THE USE OF
TECHNIQUES LIKE MARGINAL COSTING, STANDARD COSTING ETC.
 IT PROVIDES USEFUL DATA FOR THE PREPARATION OF FINAL ACCOUNTS BY GIVING
COST OF CLOSING STOCK OF RAW MATERIALS, WORK-IN-PROGRESS AND FINISHED
GOODS.
 IT HELPS IN FIXING PRICES OF PRODUCT AND SERVICES
 IT HELPS THE IMPLEMENTATION OF INCENTIVE WAGE PLANS FOR WORKERS.
 IT EMPLOYS THE SYSTEM OF BUDGETARY CONTROL AND STANDARD COSTING FOR
EFFICIENCY PLANNING CONTROL
 IT PROVIDES SPECIALIZED SERVICE OF COST AUDIT
 COST RECORDS ARE THE BASE FOR MANAGEMENT INFORMATION SYSTEM.
COST
 COST IS A FORGOING MEASURED IN MONETARY TERMS INCURRED OR
POTENTIALLY TO BE INCURRED TO ACHIEVE A SPECIFIC OBJECTIVE
 COST IS DEFINED AS A EXCHANGE PRICE, A FOREGOING OR A SACRIFICE
MADE IN ORDER TO SECURE BENEFITS.
 DIFFERENCE BETWEEN COST AND EXPENSE
 COST INCLUDES MONEY SPENT ON BOTH THE EXPENSES AND ASSETS.
CLASSIFICATION OF COST
I. NATURAL CLASSIFICATION
I. MANUFACTURING COST ( DIRECT LABOR, MATERIAL AND OVERHEAD)
II. COMMERCIAL EXPENSES (ADMIN AND MARKETING EXPENSE)
II. COST WITH RESPECT TO ACCOUNTING PERIOD
I. CAPITAL EXPENDITURE
II. REVENUE EXPENDITURE
III. COST IN TENDENCY TO VARY WITH VOLUME
I. FIXED COST E.G. DEPRECIATION, RENT
II. VARIABLE COST E.G. FUEL,SPOILAGE
III. Semi variable cost e.g. inspection, heat light etc
IV. COST IN RELATION TO PRODUCT
I. PRIME COST ( DIRECT MATERIAL + DIRECT LABOT)
II. CONVERSION COST ( DIRECT LABOR + FOH)
CLASSIFICATION OF COST
I. DIRECT MATERIAL IS MATERIAL THAT CAN BE INCLUDED DIRECTLY INTO CALCULATING
COST OF PRODUCT E.G. WOOD TO MAKE FURNITURE, GLUE AND POLISH WILL BE
INDIRECT MATERIAL
II. DIRECT LABOR IS THE LABOR APPLIED DIRECTLY TO MATERIALS COMPRISING THE
FINISHED PRODUCTS E.G. COST OF FACULTY MEMBER IS DIRECT LABOR WHILE THAT OF
GUARD OR CAFETERIA SALESMAN WILL BE INDIRECT LABOR.
III. FOH IS ALSO CALLED AS MANUFACTURING OVERHEAD AND THEY ARE THE COST OF
INDIRECT MATERIAL, INDIRECT LABOR AND ALL OTHER MANUFACTURING COSTS THAT
CANT BE CONVENIENTLY CHARGED TO SPECIFIC UNITS, JOBS OR PRODUCTS.
IV. COST IN RELATION TO MANUFACTURING DEPARTMENT
I. PRODUCING DEPARTMENT
II. SERVICE DEPARTMENT ( WHICH IS NOT DIRECTLY ENGAGED IN PRODUCTION OF GOODS BUT
ASSIST THE PRODUCING DEPT
III. COST CENTERS= WHEN TWO OR MORE DIFFERENT TYPES OF MACHINES PERFORM DIFFERENT
OPERATIONS ON A PRODUCT WITHIN THE SAME DEPT IT WOULD BE CALLED AS COST CENTER.
E.G. IN MANUFACTURING COTTON YARN AND CLOTH PRODUCING DEPT CARDING CAN BE
BROKEN INTO COST CENTERS LIKE OPENING COTTON BALES, PICKING, CARDING, DRAWING
ETC.
  
CLASSIFICATION OF COST
I. COMMON AND JOINT COSTS
I. COST OF FACILITIES OR SERVICES EMPLOYED IN TWO OR MORE ACCOUNTING
PERIODS, OPERATIONS OR SERVICES E.G. CAPITAL EXPENDITURE AND
DEPRECIATION
II. JOINT COST OCCURS WHEN THE PRODUCTION OF A PRODUCT BECOMES POSSIBLE
ONLY WITH THE PRODUCTION OF OTHER PRODUCTS LIKE OIL AND GAS
INDUSTRY, MEAT INDUSTRY ETC.
II. COST FOR PLANNING AND CONTROL
I. STANDARD COST: IT IS THE PREDETERMINED COST FOR DIRECT MATERIAL,
LABOR AND OVERHEADS
III. COST FOR ANALYTICAL PROCESS
I. OPPORTUNITY COST: THE COST OF FOREGOING ONE THING IN FAVOR OF ANY
OTHER THING
II. OUT OF POCKET COST: AN EXPENSE INCURRED AND PAID FOR BY AN INDIVIDUAL
FOR PERSONAL USE, OR RELATING TO ONE'S EMPLOYMENT OR BUSINESS. THIS
CAN ALSO RELATE TO ONGOING COSTS OF OPERATING A FIXED ASSET E.G. REPAIR
AND MAINTENANCE EXPENSE OF A MACHINE OR BUILDING ETC.