Ch-1 Introduction to Cost Accounting

INTRODUCTION TO COST ACCOUNTING

ACCOUNTING

The actual record making phase (i.e. recording, classifying and summarizing) of accounting is called book-keeping. Accounting is concerned with the use to which these records are put, their analysis and interpretation.

Accounting is wider term and includes the recording, classifying and summarizing of business transaction in term of money, the preparation of financial reports, the analysis and interpretation of these reports for the information and guidance to management

RCORDING-All financial transaction into journal

CLASSIFYING- The transaction from journal

are classified and posted to Ledger

SUMMARIZING- Prepare trial balance and final

accounts to know financial position of firm.

ANAYSIS AND INTERPRETATION-To

calculate various ratios and percentage in order to

evaluate past performance and make future plans

COMMUNICATION- All information should be presented in form of

reports to management for decision-making.

FUNCTIONS OF ACCOUNTING

OBJECTIVE OF ACCOUNTING

OBJECTIVE OF ACCOUNTING

TO ASCERTAIN WHETHER THE

BUSINESS OPERATIONS HAVE BEEN

PROFITABLE OR NOT

TO ASCERTAIN FINANCIAL

POSITION OF THE BUSINESS

TO GENERATE INFORMATION TO FACILITATE

PLANNING, CONTROL AND

DECISION-MAKING

ADVANTAGE OF ACCOUNTING

Replacement of memory.

Evidence in court.

Settlement of tax liability.

Comparative study.

Sale of business

Assistance to insolvent person

Assistance to various interested parties

LIMITATION OF ACCOUNTING

Effect of price level is not considered

No realistic information

Personal bias of Accountant

Permit alternative treatment

Historical in nature

BRANCHES OF ACCOUNTING

•This branch of accounting is concerned with ascertainment of profit or loss during a specific period, to show financial position of business on particular date.

•To impart such information to outsider.

FINANCIAL ACCOUNTING

•This branch of accounting is concerned with ascertainment of cost relating to various activities of the business and to have cost control.

•To provide cost data for the use of management in controlling current operations and planning for future.

COST ACCOUNTING

•This branch of accounting is concerned with providing accounting information that is useful to management.

•To provide accounting information to management for planning , controlling and decision making.

MANAGEMENT

ACCOUNTING

Financial accountingThe American Institute of Certified Public Accountant has defined the Financial Accounting as

“ the art of recording, classifying and summarizing in significant manner in terms of money transaction and events which in part, at least of a financial character and interpreting result there of .”

Financial Accounting is science and art of recording and classifying business transaction and preparing summaries for determining year end profit or loss and the financial position of concern.

LIMITATIONS OF FINANCIAL ACCOUNTING

The Financial accounting is concerned with preparation of final accounts, i.e., Profit and Loss Account and Balance Sheet. The management needs information for planning , controlling and decision making. It is because of limitation of financial accounting that cost accounting and management accounting is developed.

Historical Nature- Financial accounting is mainly historical and tells about the cost already incurred. It does not provide day-to-day cost information to management.Not helpful in fixation of price- In financial accounting cost are not available as an aid in determining prices of products, services, production order and line of products.Provide information about the concern as whole- The information is not recorded product-wise, process-wise, department-wise and activity-wise so as to be helpful in cost determination and cost control.No classification of Expense and accounts-In Financial accounting, there is no classification of cost by department, process, product etc. There is no classification of direct and indirect cost.

No control over cost- It does not provide proper control of material and supplies, wages, labor and overheads.No analysis of loss- It does not provide complete analysis of losses due to defective material, idle time, idle plant and equipments.Inadequate information for reports- It does not provide adequate information for report to outside agencies such as bank, government, insurance and trade associations.No answer to certain questions-•Should attempt be made to sell more or is factory operating to capacity?•If order or contract is accepted, is price obtainable sufficient to show profit?•If machine is purchased to carry out a job, at present done by hand, what will be effect on profit?

MANAGEMENT ACCOUNTING

Management accounting is the presentation of accounting information in such a way as to assist management in creation of policy and day-to-day operation of a business firm. Thus, it relate to the use of accounting data collected with help of financial accounting and cost accounting for the purpose of policy formation, planning, control and decision making.

“Management Accounting is concerned with accounting information that is useful to management”---- R. N. ANTHONY

COST ACCOUNTINGThe term ‘cost’ has wide variety of meanings. Different people use this term in different senses for different purposes. For example, while buying a book, you generally ask, “how much does it cost?” Here cost means price. But in management terminology, the term cost refer to expenditure and not the cost.

According to Institute of cost and Management Accountants, London defines cost as “ the amount of expenditure incurred on or attributable to a given thing.”

DEFINITION OF COST ACCOUNTING

Wheldon defines Cost Accounting as “ Cost Accounting is the application of accounting and costing principles, methods and techniques in the ascertainment of costs and analysis of saving/ or excess cost incurred as compared with previous experience or with standards.”

Cost accounting is concerned with collection, classification, ascertainment of cost and its accounting and control relating to various element of cost. It establishes budgets and standard cost and actual cost of operations, processes, department or products and analysis of variances, profitability and social use of funds.

CHARACTERISTICS OF COST ACCOUNTING

It is process of accounting for costIt records income and expenditure relating to production

of goods and servicesIt provide statistical data on the basis of which future

estimates are prepared.It is concerned with cost ascertainment , cost control and

cost reduction.It establishes budgets and standards, so that actual cost

can be compared to find out the deviationsIt involves the preparation of right information to right

person at right time so that it may be helpful to management for planning, evaluation of performance, control and decision making.

COST ASERTAINMENT

COST CONTROL

COST ACCOUNTING

SCOPE OF COST ACCOUNTING COST ASCERTAINMENT- It

deals with collection and analysis of expense, the measurement of production of the different products at different stages of manufacture and linking up production with expenses. For this purpose different technique of costing such as Marginal costing, Total cost technique , direct cost technique is used.

COST ASERTAINMENT

COST CONTROL

COST ACCOUNTING

SCOPE OF COST ACCOUNTING

COST ACCOUNTING- It is a process of accounting for cost which begins with recording of expenditure and ends with preparation of statistical data.

COST CONTROL- It aims at guiding the actual performance towards the targets, regulates the actuals if they deviate. The cost can be controlled by standard costing, budgetary control , cost audit etc.

OBJECTIVES OF COST ACCOUNTING

TO ASCERTAIN COST- with the help of cost accounting, cost per unit of product, job or process is calculated. For calculating cost, various method such as unit costing, job costing, contract costing is used.COST CONTROL- cost control is reducing the cost of production by controlling the wastage of material, labor and other expenses. It help to improve the efficency of organization.DETERMINATION OF SELLING PRICE- Cost accounting has the main object to help in fixation of selling price of product or services.

OBJECTIVES OF COST ACCOUNTING

ASCERTAINMENT OF PROFITABILITY- Profitability means capacity to earn profit of department, section, product, job, process etc. This capacity can be judged with help of cost data provided by cost accounting.PROVIDES A BASE FOR SETTING BUSINESS POLICIES- Cost accounting helps to provide accurate cost information. These cost data help the management in setting short-term and long-term policies.CONTROL ON WASTAGE- Cost accounting can explain the sources of wastage in the element of cost and thus control them.INTER-FIRM COMAPARISON- Cost accounting helps in making comparisons of cost or profit of one firm with another operating in same industryEFFECTIVE INFORMATION SYSTEM-The objective of costing is to prepare regular repots on elements of cost and to communicate those report to management .

COST MANAGEMENT

The techniques and process of ascertaining cost involve three steps(i) Collection of expenditure or cost data,

(iii) Classification of expenditure as per cost elements, function, etc. and

(iii) Allocation and apportionment of expenditure to the cost centres and cost units.

COST MANAGEMENT

Collection of cost data

Classification of cost as per cost

element, functions

Allocation and apportionment of

cost

Point of Distinction

Financial Accounting Cost Accounting

Purpose Its main purpose is to ascertain profit and loss and financial position of business.

Its main purpose is to ascertain cost and cost control.

Recording It classifies, record and analyses the transaction in subjective manner i.e. according to nature of expense.

It records the expenditure in objective manner i.e. according to purpose for which the cost are incurred.

Control It lay emphasis on recording aspect.

It provides a detailed system of control for labor, material and overhead cost with help of control technique.

Periodicity of reporting

It reports operating result and financial position usually at the end of year

It provide information through cost reports to management as and when desired.

Reporting Aims at external reporting to shareholders, government, investors, other partied

Aims at internal reporting to managers for controlling and decision-making.

FINACIAL ACCOUNTING VS COST ACCOUNTING

Point of Distinction Financial Accounting Cost Accounting

Reporting of costs Cost are reported in aggregates in financial accounts.

The cost are broken on down on a unit basis in cost accounts.

Information The information is provided in monetary terms.

The information is both monetary and non-monetary(units, job, contract etc.)

Fixing of selling price No fixation of Selling price Provide sufficient information for fixation of selling price

Stock valuation Valued at cost or market price which ever is lower

Valued at cost .

Disclosure of relative efficiency

Fail to create difference between efficiency and inefficiency of worker, cost centre, plant etc

Disclose the efficiency as records of the productivity of each worker, cost centre, plant etc

Maintenance of accounts optional/mandatory

Compulsory under companies act.

Maintenance is voluntary except in certain industries where companies act permit.

COST ACCOUNTING VS MANAGEMENT ACCOUNTINGPoint of distinction Cost accounting Management accounting

Purpose It deals with ascertainment, allocation and accounting aspect of cost

It deals with providing accounting information useful to management.

Base/ Derivation of data

Provide base for management accounting. It is derived from financial accounting.

It is derived from both cost and financial accounting

Scope Does not include financial accounting, tax planning and accounting

Include Financial accounting, cost accounting, tax planning and accounting

Planning Aspect Concerned with short-term planning

Concerned with short-term and long-term planning

Tools and technique

Cost account have greater application of standard costing, differential costing, and budgetary control

Management accounting in addition to tools of cost accounting apply other tools such as Fund flow statement, cash flow statement, ratio analysis.

Point of distinction Cost accounting Management accounting

Installation of system

It can be installed without the help of management accounting system.

It cannot be installed without proper cost and financial accounting system.

Status of accountant The status of cost accountant comes after management account.

Management accountant is senior in position to cost accountant.

ADVANTAGE OF COST ACCOUNTING

Profitable and unprofitable activities are disclosed and steps are taken to reduce unprofitable activitiesIt enable a concern to measure the efficiency and then to maintain and improve it.It provide information upon which estimates and tenders are based. It guide further production policies.It helps in increasing profits.The exact cost of increase or decrease in profit or loss can be detected.It discloses relative efficiencies of different workers and thereby facilitates introduction of suitable plans for wage payment to reward efficiency.It is helpful to government.It is helpful to customer.