Contents -

1. Meaning and Definition of Cost.
2. Meaning and Definition of Cost Accounting.
3. Objectives of Cost Accounting.
4. Advantages and Disadvantages of Cost Accounting.
5. Methods and Techniques of Costing.

  • Meaning and Definition of Cost -

The total expenditure inclusive of money, labour and time incurred on goods and services is called "cost". In certain exception situation the cost which are generally considered as expenses in the present scenario might not go into the record books.
The outcome of initiation and consumption of resources is denoted in monetary terms. The producer firms use it as an internal control process and it is not accessible to third parties.
The term cost is the money used for the purpose of producing something. Since it has been already utilised, it is not available for any other use. The cost also include the money spent for acquiring something. From business point of view, the expenditure incurred for acquisition and repair purpose constituted as "Cost".

According to ICMA, London :
"Cost is the amount of expenditure (actual or notional) incurred on, or attributable to, a specified thing or activity or cost unit".

According to AICPA, Committee :
"It is the amount measured in money or in cash expended or other property transferred, capital stock issued, service performed or a liability inccured in consideration of goods or services received or to be received".

  • Meaning and Definition of Cost Accounting -

Cost accounting may be defined as, "the process of accounting for cost". The process involves recording as well as controlling of various costs. This is a formal system of accounting which ascertain and control cost related to various products and services.

According to the ICMA, London :
"Cost accounting is, the process of accounting for the cost which begins with the recording of income and expenditure and ends with the preparation of periodical statements and reports for ascertaining and controlling cost".

According to L.C. Cropper :
"Cost accounting means a specialised application of the general principles of accounting in order to ascertain the cost of producing and marketing any unit of manufacturer or of carrying out any particular job or contract".

  • Objectives of Cost Accounting -

1) Ascertainment of Cost -
The process of ascertainment of cost involved computation of cost which has been incurred. The cost may be ascertained for different products, services or activities using various costing methods. Determination of cost is important for the purpose of controlling them and for providing cost information to the top management for decision making. It should be ensured that the cost of a particular product or services are properly assessed.

2) Estimation of Cost -
While cost or ascertain after it has been incurred, the estimation of cost is done before their actual incidence. For the purpose of estimation and allowance is generally made for adjusting the deviations as various costs such as material cost, labour cost and overheads to fluctuate. Cost estimation is for the following purpose :
a) Cost estimation is important for the purpose of bidding and submitting tenders.
b) It is also useful for preparing budget.
c) Cist estimation helps in evaluating projected performers.
d) Cost estimation is useful for the purpose of financial statement projection.
e) It is important for the cost control purpose.

3) Control of Cost -
Cost control is related to controlling and reducing cost for the purpose of improving efficiency. Cost control can achieve this efficiency by full utilisation of output at minimum cost. Two main techniques used for the purpose are budgetary control and standard costing. Under this process, various areas are identify where the efficiency may be increased by reducing wastage and cost. Various remedial measures may also be taken for cost control.

4) Reduction of Cost -
The ending of cost control function is the stating of cost production function. It involves making actual and permanent reduction in the production cost of goods and services. It achieve the objective by getting non essential for inefficient activities. Technological advances may render many activities non-essential. Similarly brain storing sessions may be included out of questions standard activities. Various areas where cost may be controlled are designing, administration, finance and production.

5) Preparation of Cost Statement -
Different element of total cost are shown in a cost statement. This statement shows the total cost, unit cost, unit produced and sold, closing stock in terms of unit and value etc. Production process and other process should be consistency reviewed to maintain efficiency. Cost accounting present information with proper analysis for different time period raising for daily basis to yearly. Thus, a cost statement serve complete information tool for the management.

6) Helpful in Managerial Decisions -
Cost accounting is framed in a manner to help the management. It provide information for making various decisions such as, product diversification, fixing of selling price and make or buy decisions. It is also helpful for evaluating A product line, factory shutdown decisions and determination of alternative method of manufacture. Cost accounting useful for the purpose of making various other decisions such as shut down decisions, dropping a product line, key factor areas and selection of profitable product mix.

  • Advantages of Cost Accounting -

1) Aid to Management -
Cost accounting helps the management in taking various decision regarding different functions. The data provided by the cost accounting help the management in determining unprofitable activities. It also helps in measuring efficiency of various process and functions.
Cost accounting provide information which may be used for submitting lenders. It also aids in the process of farming policies. Elimination of wasteful activity lead to higher profit. A well-established cost accounting system helps in producing reliable data. The cost accounting system serve the management in following ways :
a) Help in eliminating and turning unprofitable activities.
b) Helpful in comparison of data.
c) Provide information on Cost estimates.
d) Helps in managerial decision making.
e) Helps to locating wasteful activity.
f) Periodic view of result.
g) Provide reliable data.

2) Useful for Outsider -
An efficient cost accounting system is good for outsiders as well. The data provided by cost accounting system helps them in evaluating financial soundness of the organisation. Organisation with well-established accounting system are considered to be more efficient. This can help the firm in attracting more investment.

3) Advantage to Employee -
There are some advantages of cost accounting for the employees of the organisation.Cost accounting help in reducing cost and increasing profitability with regard to cost incurred and production unit required in different department and processes. It is also helpful for the purpose of introducing incentive compensation system and bonus plans.

4) Useful for Government and the Society -
Cost accounting also useful for the government and society for various reasons.Cost accounting helps organisation in reducing cost and increasing profit. It results in payment of higher taxes which is the society and economy. Cost control help in providing goods at lower costs. Cost accounting also help in making national policies.

  • Disadvantages of Cost Accounting -

1) Duplication of Work -
Cost accounting system is used in conjunction with financial accounting. This may lead to duplicity of efforts. For many firms, financial accounting serve these purpose in an economic manner.

2) No Social Accounting -
Cost accounting does not deal with social cost and thus provide one sided view. It does not take cognizance of society duties of the firm.

3) Frequent Reconciliation -
Cost accounting may show results different from financial accounting. In such cases, there is need to reconcile both the system. Such reconciliation are resources intensive and may prove to be limiting factor.

4) Lack of Accuracy -
Cost accounting may not provide accurate information as it uses notional cost such as estimated cost and standard cost.

5) No Suitable for Small Scale Units -
Cost accounting system are generally not suitable for small scale units, traditional cost accounting method are more suitable.

6) In-applicability of Costing Methods and Techniques -
Different organisation use different techniques and methods of cost accounting. This method are based on the nature of requirement of different circumstances. It should be ensured that accounting procedure are in accordance with the requirement of the organisation. Due to this reason, a firm need a design it's own accounting system to suite its procedure making the process more difficult and expensive.

7) System is More Complex -
Establishing cost accounting process is a complex system. It require various forms and formulas for proper calculation and presentations. This system may be difficult to implement. The employees may also resist its implementation. The complexity to the system may make a difficult for a firm to implement it.

8) Expensive -
Cost accounting system is not only Complex but also involve outflow of subsequent amount of funds which provide surely increase wages for the workholic employees. The example of investment and work required in the process of analysis, allocation and absorption of overheads. Many small and medium scale organisation may not efforts such expenses. It should be established that the benefit derived from the such system are higher than the cost involved. The cost involved is one of the biggest limited edition factor for a firm.

  • Methods of Costing -
There are two categories of methods of Costing may be broadly classified into Job costing and Process costing.

1. Job Costing -
This type of Costing is applied in business organisation, which carry out production according to the specific requirement of a customer. Each of such job work is unique / distinctive and customer specific. Job costing method is generally used by the business entities engaged in the profession of house building, ship building, production of machineries, repairing etc.
Job costing methods may be classified into following sub-category :

a) Batch Costing -
Foundation of this method of Costing is the theory of contract costing. It is applied for ascertaining the cost of group having product with similar characteristics. Instead of an individual product, the entire batch containing such product is considered as one unit. Batch costing method is used effectively by business entrepreneur engaged in manufacturing of nuts and bolts, medicines and other components which are produced in specific batches.

b) Control or Terminal Costing -
Foundation of this method of Costing is based on job costing. It is generally used by Business Enterprises engaged in the business of house building and civil contractors. The contract entered into considered as a cost unit and relevant costs are accumulated accordingly.

c) Multiple or Composite Costing -
This method of Costing is common amongst the Enterprises engaged in the manufacture of complex products, e.g. airplanes, motor cars etc. In such cases, accumulation of cost is done in respect of individual components. Thereafter, their total is taken to arrive at the total cost of the product.

2. Process Costing -
This method of Costing is used by those manufacturing sectors, which are engaged in the manufacturer of products in a continual manner on an on-going basis, e.g. Gas, Chemicals, oil, paper etc. In case of such Industries, it is not easy to compute the cost of specific unit, the average of total cost is taken for the number of units produced. For the monitoring and supervision purpose. The total cost and per unit cost is computed at each stage of production. Process costing may be classified into following sub-category :

a) Unit or Single Output Costing -
This method of Costing is popular amongst the entrepreneur engaged in the production of a single item, e.g. the end product are identical in nature, Per unit cost is computed by using simple method, i.e. divided the total cost by the total number of units produced.

b) Operating or Service Costing -
This method of Costing is common in the business entities not engaged in manufacturing any product, they are engaged in providing services like education, transportation, power supply, Hospital etc. Calculation of per unit cost is different for different service provides depending upon the nature of service provided. Example of the unit are per student (Collage), per passenger (bus), kilometres (truck), bed / patient (Hospital) etc.

c) Operating Costing -
Under this method of Costing the cost are assessed operation wise (instead of process wise). The underlying presumption of operation costing is that the final accomplishment is arrived through various operations.

  • Techniques of Costing -
There are some techniques of costing. The techniques of Costing are of the following types :

1) Historical Costing -
Under this technique, the cost for ascertain after their incurrence.

2) Variable or Marginal Costing -
As the nomenclature is self indicates, only variable cost pertaining to products or job are taken into consideration under this technique, fixed costs incurred in connection with production, administrative work and selling and distribution etc. ate charged to the profit of the business organisation during the period in which they are incurred.

3) Standard Costing -
Under this technique there are pre-determined cost incurred at the time of optimum operation efficiency and utilisation of resources referred to as the standard cost, which are compared with the actual cost. Variation between the standard cost and the actual cost become the basis for initiating corrective measures.

4) Absorption or Full Costing -
Under this technique of Costing all cost incurred in connection with the process of manufacturing, whether fixed cost or variable cost are taken into consideration for the computation of total costs.

5) Uniform Costing -
Under uniform costing, application of similar costing principle is predicted and as such it should not be considered as a costing techniques at all. It may be defined as the practice of employing standardization principle and methods of Costing accounting adopted by a number of business entrepreneurs. Standardization of principles and methods may include the method of Costing, accounting classification including codes, methods of defining cost and charging depreciation. Method of allocating or appropriating overhead to cost centres or cost unit etc. The uniform costing system help in comparison of two or more business enterprises and selling up of rational policies regarding pricing.