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Introduction to Cost Accounting

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NATURE & SCOPE OF COST ACCOUNTING ➢ CostingCosting is a technique and process of ascertaining costs. This technique consists of principles and rules which governs the procedure of ascertaining the cost. ➢ Cost AccountingCost Accounting is the classifying, recording and appropriate allocation of expenditure and for presentation of data for the purpose of control and guidance of the management. ➢ Cost AccountancyCost accountancy is the application of costing and cost accounting principles, methods and techniques to the science, art and practice of cost control and ascertainment of profitability. Cost accountancy is the science, art and practice of Cost Accountant. It is science because; it is a systematic body of knowledge. It is an art because requirement of ability and skill of cost accountant and practice because continuous effort of cost accountant. ➢ Features Of Cost AccountingI. II. III. IV. V. It is a process of accounting for cost. It records income and expenditure relating to production. It provides statistical data on the basis of which, future estimates are prepared. It involves presentation of information to the right person at the right time. Abnormal cost and past cost which aren't recovered, doesn't take into consideration. ➢ Difference between COSTING and COST ACCOUNTING:Costing i. It is a technique and process of ascertaining cost. ii. It includes principle and roles. iii. It consists of routines of ascertaining costs by historical or conventional costing, standard costing or marginal costing. Cost Accounting i. It is regarded as a specialized branch of accounting. ii. It involves classification, allocation and presentation of data. iii. It includes calculation of budgets and standard cost. ➢ Objectives of Cost Accounting:Following are the main objectives of Cost AccountingI. II. III. IV. V. By- To ascertain the cost per unit of the different products. To provide a correct analysis of cost both by process or operations and by different elements of cost. To disclose sources of wastage, whether of material, time or expenses and etc. To provide requisite data and serve as a guide for fixing price of manufacturing products. To ascertain the profitability of each of the products and advise the management as to how these profits can be maximized. Aditya Page 1

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NATURE & SCOPE OF COST ACCOUNTING VI. To exercise effective control of stock of materials and finished goods in order to minimize the capital locked up in the stocks. VII. To reveal sources of economy by installing and implementing a system of cost control for material, labour and over heads. VIII. To advice management on future expansion policies and proposed capital projects. IX. To help in the preparation of budget and implementation of budgetary control. X. To guide management in the formulation and implementation of bonus plans based on productivity and cost saving. XI. To organize effective information system. ➢ Advantages Of Cost Accounting:Main advantages of cost accounting are as follows; 1. Advantages to ManagementI. Cost accounting helps in disclosing profitable and unprofitable activities. II. Cost accounting measures the efficiency of different department and activities. III. Cost accounting helps in cost control by eliminating and reducing all possible wastage and losses. IV. It aims at reduction of cost and increment of profit. V. Cost accounting provides cost reports to the management which helps in taking decisions. VI. It provides data by which optimum utilization of resources is possible. VII. Cost accounting provides information which suggests the management to fixed the price. VIII. It guides the management on making polices about future expansion. IX. It helps in implementation of cost audit. 2. Advantages to creditors and investorsBusiness with good costing system will attract more investors because it improves the financial strength and creditworthiness of a business. 3. Advantages to GovernmentCost accounting helps the government in assessment of Excise Duty, Income Tax, Export and Import Taxes and etc. 4. Advantages to ConsumersThe main aim of cost accounting is to minimisation of cost and maximisation of profit. 5. Advantages to WorkersCost accounting helps in formulation and implementation of incentive and bonus schemes for the workers. By- Aditya Page 2

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NATURE & SCOPE OF COST ACCOUNTING ➢ Difference between FINANCIAL ACCOUNTING and COST ACCOUNTING:Financial Accounting i. It provides information about profit & loss and financial position of the business. ii. It is prepared to meet the requirements of Companies Act and Income Tax Act. iii. It records information on subjective manner. iv. It reports operating results and financial position usually at the end of the year. v. It shows the net profit or net loss of the business as a whole. vi. It records commercial transactions. vii. Only monetary transactions are recorded. viii. ix. x. It doesn't help in fixing selling price. It deals with actual facts and figures. Stocks are valued at cost or market price whichever is lesser. Cost Accounting i. It provides information to management for planning and control and decision making. ii. It is prepared to meet the requirements of management. iii. iv. v. vi. vii. viii. ix. x. It records information on objective manner. It reports the result whenever required by the management. It shows profit or loss of each product, job or service. It records manufacture transactions. Both monetary and non-monetary transactions are recorded. It provides data for fixing selling price. It deals partly with facts and figures and partly with estimated figures. Stocks are valued at cost price. ➢ LIMITATIONS OF COST ACCOUNTING:I. II. III. IV. By- Aditya Cost Accounting lacks a uniform procedure. There are a large number of conventions, estimates and flexible factors which is very difficult to follow. There are many formalities to be followed. It becomes difficult for a small and medium scale business to use it. There is no help for handling futuristic situations in cost accounting. Page 3

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COST ANALYSIS & PREPARATION OF COST SHEET ➢ Costing - Costing is a technique and process of ascertaining costs. This technique consists of principles and rules which govern the procedure of ascertaining the cost. ➢ Cost Accounting - Cost Accounting is the classifying , recording, and appropriate allocation of expenditure and for presentation of data for the purpose of control and guidance of the management. ➢ Cost Accountancy - Cost Accountancy is the application of costing and cost accounting principles, methods and techniques to the science, art and practice of cost control and the ascertainment of cost control and profitability. Cost Accountancy is the Science, Art and practice of a cost accountant. It is science because, it is a systematic body of knowledge. It is an art because, it requires the ability and skill with which a cost accountant is able to apply the principles of cost accountancy to various managerial problems. And Practice because , it requires continuous efforts of a cost accountant. ➢ Features of Cost Accounting I. It is a process of accounting for Cost. II. It records income and expenditure relating to production. III. It provides statistical data on the basis of which future estimates are prepared. IV. It involves presentation of information to the right person at the right time. V. Abnormal cost and past cost which are not recovered doesn't take into consideration. ➢ Distinguish between Costing and Cost Accounting. COSTING COST-ACCOUNTING i. It is a technique and process of i. It is regarded as specialised branch of ascertaining cost. accounting. ii. It includes Principles and rules. ii. It involves classification, allocation and presentation of data. iii. It consists of routines of ascertaining iii. It involves calculation of budgets and costs by historical and conventional standard costs of operation, cost, standard costing or marginal classifications, recording and costing. appropriate allocation of expenditure. ➢ Objectives of Cost Accounting:Following are the main objectives of Cost AccountingI. II. III. IV. V. By- To ascertain the cost per unit of the different products. To provide a correct analysis of cost both by process or operations and by different elements of cost. To disclose sources of wastage, whether of material, time or expenses and etc. To provide requisite data and serve as a guide for fixing price of manufacturing products. To ascertain the profitability of each of the products and advise the management as to how these profits can be maximized. Aditya Page 1

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