Chapter 1

COST ACCOUNTING: AN OVERVIEW

Meaning of Costing and Cost Accounting

Cost : Costing refers to the practice of identifying costs of any product, service or activity, at various times and stages of production

Cost accounting: Cost Accounting is a method of accounting that records, classifies, allocate, summarize, analyse, interpret and controls the cost incurred on any product, process, service or activity.

Objectives of Cost Accounting

1) Process of Accounting for Cost
2) Records Income and Expenditure
3) Provides Statistical Data
4) Helps in Cost Control
5) Preparation of Budget
6) Comparison of Actual with Standard
7) Presentation of Correct Information
8) Helps in Decision Making

FINANCIAL ACCOUNTING AND COST ACCOUNTING

Cost accounting: Cost accounting creates information in order to maintain track of activities in order to maximise revenue and effectiveness of the firm.

Financial accounting: Financial accounting determines the financial outcomes for the budgeting period as well as the status of holdings or even liabilities at the final day of that period.

Limitations of Financial Accounting

1) No Detail Cost Information
2) No Segregation of Cost
3) No Cost Control Mechanism
4) No Information About Loss
5) Concerns Only With Past Records
6) No Performance Evaluation
7) Does Not Assist Decision Making
8) Not Useful For Small Organizations

Cost accounting Relationship with Financial Accounting

Cost accounting compiles the cost of raw materials, work-in-process, and finished goods inventory, while financial accounting incorporates this information into its financial reports (primarily into the balance sheet).

difference between cost accounting and financial accounting

Cost accounting: Cost accounting creates information in order to maintain track of activities in order to maximise revenue and effectiveness of the firm.

Financial accounting: Financial accounting determines the financial outcomes for the budgeting period as well as the status of holdings or even liabilities at the final day of that period.

Advantages of Cost Accounting

1) Facilitates Price Fixation
2) Helpful For Wastage Control
3) Helps To Control Unnecessary Costs
4) Assures Optimum Efficiency
5) Helpful To Make Proper Decision
6) Maintains Proper Inventory System
7)Suitable For Large Business Houses

Objections against Cost Accounting

The commonest objections to accounts of this type are that they duplicate work already done on the financial records and that they are unnecessary.

1) Want of Necessity
2) Inapplicability
3) Failure in Many Cases
4) Mere Matter of Forms and Rulings
5) Expensive

Costing Methods and Techniques

Methods

1.Unit Costing
2.Job Costing
3. Contract Costing
4. Batch Costing
5. Operating Costing
6. Process Costing.
7. Multiple Costing
8. Uniform Costing.

Techniques

1.Absorption Costing
2.Standard Costing
3.Marginal Costing
4.Lifecycle costing
5.Target Costing
6.Uniform Costing
7.Direct Costing

Concept of Installation of a Costing System

A costing system is an established set of procedures, rules, cost records, etc., for the purpose of achieving specified objective at minimum cost. It forms the basis for future operations. All types of concerns can adopt no one single system.

Practical Difficulties in Installation

1. Lack of Support from Top Management 2. Resistance from the Existing Staff 3. Non-Co-operation at Other Levels 4. Shortage of Trained Staff. 5. Heavy Costs.

Essentials of a Good System

1 Browse more Topics under Fundamentals Of Cost Accounting.
2 Suitability.
3 Simplicity.
4 Flexibility.
5 Economical.
6 Comparability.
7 Timely.
8 Minimum Effort.

Questions

1. “Limitations of financial accounting have made the management realize the importance
of cost accounting” Comment.
2. What is cost accounting? Discuss briefly its objectives and advantages?
3. State the main differences between cost accounting and financial accounting?
4. You have been asked to install a costing system in a manufacturing business. What
practical difficulties would you expect and how do you propose to overcome them?
5. “Cost accounting system is neither unnecessary nor expensive rather it is a profitableinvestment” Comment.
6. What method of costing would you adopt for the following industries? Give reasons
1. Ship building
2. Toy making
3. Oil refinery
4. Sugar
5. Road transport company