COST ACCOUNTING
COST ACCOUNTING
INTRODUCTION:
Accounting is
process of identifying, measuring, recording, summarizing, analyzing and interpreting
financial information for the purpose of various decision making related to
business
Branches of
Accounting:
- FINANCIAL ACCOUNTING
- COST ACCOUNTING and
- MANAGEMENT ACCOUNTING
DUE TO THE VARIOUS
LIMITATIONS OF FINANCIAL ACCOUNTING, THERE IS RISE OF CONCEPT OF COST ACCOUNTING.
Meaning:
Cost means the Expenditure incurred
for producing a product or for providing a service.
Cost Accounting
refers to the process of accounting for cost, which means recording of income
and expenditure on the bases on which they are calculated. For the purpose of
preparing periodical statements and reports for determining and controlling
costs.
Cost Unit
means the Unit of production, service or time or combination of these, in
relation to which costs may be ascertained or expressed.
Cost Center
means a location, a person, an item of equipment or a group of these, for which
cost may be ascertained and used for the purpose of cost control.
Techniques of
Costing helps in controlling and reducing cost, such as, Budgetary control,
Standard Costing, Marginal Costing, Target Costing, Life Cycle Costing,
Activity Based Costing etc.
OBJECTIVES OF
COST ACCOUNTING:
1.
The main objective is COST ASCERTAINMENT.
2.
To find out Selling price of product
or a service.
3.
To control the cost or by reducing
the cost, the profitability can be improved.
4.
To calculate the profit of each product,
process, activity, function, department, division or a group of these.
5.
To provide accurate information the
management for decision making.
6.
To help in appropriate price fixation
and seizing healthier market share.
7.
To facilitate in Inventory control.
DIFFERENCE
BETWEEN COST ACCOUNTING AND FINANCIAL ACCOUNTING
POINT OF DIFFERENCE
|
COST ACCOUNTING
|
FINANCIAL ACCOUNTING
|
MEANING
|
It means a systematic procedure of determining the
unit cost of a product / service
|
It means recording of Business transaction to know
Profit & Loss and Financial position of a Business
|
OBJECTIVE
|
Its main objective is to control cost and reducing
the cost
|
Its main objective is to Ascertainment of Profit /
Loss and Financial position
|
NATURE
|
Its objective, as the recording is based on facts
|
Its Subjective, as the recording is based on policies
|
PURPOSE
|
Its main purpose to serve Management of the business
in Decision Making.
|
Its main purpose to serve external stakeholders of
the business.
|
TIME OF PROCESS
|
It is prepared on continuous basis.
|
It is prepared on periodical intervals.
|
ANALYSIS AND DECISION MAKING
|
The analysis and Decision making are based on cost
information are concurrent and facilitates most decisions of the management.
|
Analysis is based on financial statements and which
not support for most managerial decision.
|
VALUATION OF STOCK
|
It is valued at cost price.
|
It is valued according to Convention of
Conservatism.
|
OVERHEADS
Overheads are
the expenditure which can not be traced to or identified with any particular
cost unit. Which are not directly identifiable such as indirect materials, Indirect
wages and other indirect expenses. In other words, it is total indirect cost.
Accounting of
Overheads:
- Estimation and Collection of
Overheads.
- Cost Allocation.
- Cost Apportionment.
- Cost Reapportionment.
- Absorption.
- Treatment of over-absorption and
Under-absorption.
Estimation of
Overheads means estimating the cost through sources, such as,
Invoices, Stores Requisitions, Wage analysis book and Ledger.
Cost
Allocation refers to assigning overheads directly to the
various departments. It is possible only when its related to a particular cost
unit or cost center.
Cost Apportionment
refers
to allotment of proportion of cost to cost centers or cost units, on some
appropriate basis. It is nothing but unallowable expenses are to be spread
over the various departments.
Cost Re-apportionment is done when business
has service department along with production department. The cost apportioned to
service department is re-apportioned or re-distributed to production
departments. Because service departments generally do not earn revenues.
METHODS OF
RE-APPORTIONMENT:
- DIRECT RE-APPORTIONMENT
According
to this method, the overheads distributed to service department
are reapportioned to production department on some suitable basis.
OVERHEAD
/ EXPENSES
|
BASIS
OF APPORTIONMENT
|
LIGHTING
|
AREA
/ LIGHT POINTS
|
INSURANCE
|
VALUE
OF STOCK
|
E
S I
|
NO
OF EMPLOYEES
|
REPAIRS
TO PLANT
|
VALUE
OF PLANT
|
POWER
CONSUMED
|
Horse Power OF PLANT
|
SUPERVISION
|
NO
OF EMPLOYEES
|
DEPRECIATION
|
VALUE
OF PLANT
|
RENT
|
AREA
|
CANTEEN
EXPENSES
|
NO
OF EMPLOYEES
|
2.
REPEATED DISTRIBUTION METHOD
According
to this method, when service department render service to other
service departments, on appropriate method overheads are apportioned between
production department and concerned service department too. Likewise, other
service department overheads are redistributed among production and first
service departments, this process continues till the amount of service
department becomes negligible.
3. SIMULTANEOUS EQUATION METHOD
According
to this method, Mathematical equations are formed to calculate
the amount of overheads of each service department along with its portion of
other service departments. Then such amount is distributed to production
department.
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