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Cost Accounting
Cost Accounting
Cost Accounting
Cost Accounting
INTRODUCTION
Industrialization and advent of factory system during the second half of 19th
Century necessitating accurate cost information have led to the development
of cost accounting. The growth of cost accounting was slow. To quote Eldons
Handristen “Not until the last 20 years of the 19 th Century was there much
literature on the subject of cost accounting in England and even very little
was found in the United States. Most of the literature until this time
emphasized the procedure for the calculation of prime costs only”.
Rapid development in cost accounting has taken place after 1914 with the
growth of heavy industry and large scale production as a consequence of
First World War when cost other than material and labour (overhead)
constituted a significant portion of total cost.
The development of cost accounting in India is of recent origin and it is given
importance after independence, when provision for Cost Audit under Sec.233
B of Companies Act was made. Vivian Bose Enquiry Committee revealed the
malpractices of manufacturing companies. It was felt that the financial audit
falls short of expectations to reveal the malpractices. Therefore, under the
Companies Act, the government was given the power to order for cost audit.
This has given impetus to the development of cost accounting in India.
and cost accounting principles, methods and techniques to the science, art
and practice of cost control and the ascertainment of profitability. It includes
the presentation of information derived there from for the purpose of
managerial decision making”.
Cost accounting helps in fixing prices. It provides detailed cost data of each
product (both on the aggregate and unit basis) which enables fixation of
selling price. Cost accounting provides basis information for the preparation
of tenders, estimates and quotations.
4 Avoidance of wastage
Cost accounting reveals the sources of losses or inefficiencies such as
spoilage, leakage, pilferage, inadequate utilization of plant etc. By
appropriate control measures, these wastages can be avoided or minimized.
5 Highlights causes
The exact cause of an increase or decrease in profit or loss can be found with
the aid of cost accounting. For instance, it is possible for the management to
know whether the profits have decreased due to an increase in labour cost or
material cost or both.
6 Reward to efficiency
Cost accounting introduces bonus plans and incentive wage systems to suit
the needs of the organization. These plans and systems reward efficient
workers and improve productivity as well improve the morale of the work
-force.
7 Prevention of frauds
Cost accounting envisages sound systems of inventory control, budgetary
control and standard costing. Scope for manipulation and fraud is minimized.
8 Improvement in profitability
Cost accounting reveals unprofitable products and activities. Management
can drop those products and eliminate unprofitable activities. The resources
released from unprofitable products can be used to improve the profitability
of the business.
10 Facilitates control
Cost accounting includes effective tools such as inventory control, budgetary
control and variance analysis. By adopting them, the management can
notice the deviation from the plans. Remedial action can be taken quickly.
5 It is based on Estimations
Some people claim that costing system relies on predetermined data and
therefore it is not reliable. Costing system estimates costs scientifically
based on past and present situations and with suitable modifications for the
future. This leads to accurate cost figures based on which management can
initiate decisions. But for the predetermined costs, cost accounting also
becomes another ‘Historical Accounting’.
system will help in the control of labour cost. Since the cost of material forms
a great proportion to the total cost, there must be an efficient system of
stores control.
10 A Sound Plan
There must be proper and sound plans to collect, to allocate and to apportion
overhead expenses on each job or each product in order to find out the cost
accurately.
11 Reconciliation
The systems of costing and financial accounting must be facilitated to
reconcile in the easiest manner.
12 Overall Efficiency of Cost Accountant
The work of the cost accountant under a good system of costing must be
clearly defined as to his duties and responsibilities to the firm are very
essential.
Cost Unit:
A cost unit refers to a unit of product, service or time in relation to which
costs may be ascertained or expressed. In other words, cost unit is the unit
of output for which cost is ascertained. For examples, the cost of air-
conditioner is ascertained per unit.
if there are two divisions in a textile company, say readymade and clothing,
each one may be regarded as a profit centre.
COST CONTROL
Cost control can be defined as the comparative analysis of actual costs with
appropriate standards of budgets to facilitate performance evaluation and
formulation of corrective measures. It aims at accomplishing conformity
between actual result and standards or budgets. Cost control is keeping
expenditures within prescribed limits.
Cost control has the following features:
i) Creation of responsibility centres with defined authority and responsibility
for cost incurrence.
ii) Formulation of standards and budgets that incorporate objectives and
goals to be achieved.
iii) Timely cost control reports (responsibility reporting) describing the
variances between budgets and standards and actual performance.
iv) Formulation of corrective measures to eliminate and reduce unfavourable
variances.
v) A systematic and fair plan or motivation to encourage workers to
accomplish budgetary goals.
vi) Follow- up to ensure that corrective measures are being effectively
applied. Cost control does not necessarily mean reducing the cost but its aim
is to have the maximum utility of the cost incurred. In other words, the
objective of cost control is the performance of the same job at a lower cost
or a better performance for the same cost.
COST REDUCTION
Cost reduction may be defined as an attempt to bring costs down. Cost
reduction implies real and permanent reduction in the unit cost of goods
manufactured or services rendered without impairing their (product or
goods) suitability for the use intended. The goal of cost reduction is achieved
in two says: (i) by reducing the cost per unit and (ii) by increasing
productivity. The steps for cost reduction include elimination of waste,
improving operations, increasing productivity, search for cheaper materials,
improved standards of quality, finding other means to reduce unit costs.
Cost reduction has to be achieved using internal factors within the
organisation. Reduction of costs due to external factors such as reduction in
taxes, government subsidies, grants etc. do not come under the concept of
cost reduction.
Cost reduction is a much wider concept than cost control. As stated earlier,
cost control aims at controlling costs within prescribed limits with the help of
budgets and standards. The following are the differences between the two:
Cost Control Cost Reduction
1. Cost control process involves (a) 1. Cost reduction is not concerned
setting targets and standards (b) with setting targets and standards
ascertaining actual performance (c) and maintaining performance
comparing actual performance with according to standards. Cost
targets (d) investigating the reduction is the final result in the cost
variances and (e) taking corrective control process.
action.
2. Cost control aims at achieving 2. Cost reduction aims at improving
standards, i.e. cost targets. It the standards. It challenges
assumes existence of standards. standards and assumes existence of
concealed potential savings in the
standards.
3. It follows a conservative procedure 3. It is continuous, dynamic and
and lacks dynamic approach. innovative in nature, looking always
for measures and alternative to
reduce costs.
4. It is a preventive function. 4. It is a corrective function.
5. In cost control, costs are optimised 5. In cost reduction, there is always
before they are incurred. assumed a scope for reducing the
incurred costs under controlled
conditions.
6. It is generally applicable to items 6. This is applicable to every activity
which have standards. of the business.
7. It contains guidelines and directive 7. It adds thinking and analysis to
of management as to how to do a action at all levels of management.
thing.