f&& testbook.com Cost Accounting Notes: Meaning, Objectives, Elements, Importance for Accountancy Exam Prep! 2021/09/17 Cost Accounting, as the name snggests, is associated with accounting of the costs. The term Cost Accounting implies the total of all expenditures involved in the process of production. As it is an integral part of the accounting world, knowing cost accounting is not only important for examinations but also for practical purposes aswell. In the following Cost Accounting study notes, our experts have summarized all the crucial aspects covering the topic with respect to its meaning, objectives, importance, and so on. Accounting aspirants looking for the best Cost Accounting study material will be able to find all the relevant and interesting information regarding the topic in this page. Let’s begin with understanding the meaning and concept of Cost Accounting. Find out UPPCL Assistant Accountant Recruitment 2021 details here! Meaning & Concept of Cost Accounting We know that accounting is a process of collecting and maintaining financial records of each income and expenditure. Similarly, cost accounting is also a practice of cost regulating the productivity of a business concerned with the application of accounting guidelines, process, and rules. Cost account gis a systemized approach of recording and reporting cost measurements in the process of manufacturing goods and performing services in the aggregate and in-depth. Cost accounting includes systems for recognizing, classifying, allocating, aggregating, and reporting the costs and then comparing them with the standard costs. It is done to provide the management with the end results of the costs involved in a business. Likewise, the management will be able to analyze on how to optimize the business practices and processes to achieve optimum cost efficiency and capability. Through cost accounting, businesses are able to understand the detailed cost information with which they can control current operations and plan and prepare for the future. ‘Must read: Financial Accounting for SSC CGL GK notes! Objectives of Cost AccountingThe main objective of cost accounting is to document and analyze the ways in which a business spends its resources, mainly, cash. It is a significant process for tax purposes as well ‘The information derived from cost accounting is also valuable for internal company operations, making strategic decisions, and analyzing the trends. Major objectives of the costing system a1 Ascertaining Costs Itis the main objective of cost accounting to know the cost of a product, process, or service. Determining the Selling Price As businesses aim to derive maximum profit from their activities, itis necessary that they earn revenues greater than the costs. Hence, cost accounting provides insights regarding the cost to produce and sell such products and services, Measuring & Increasing Efficiency Cost Accounting involves the study of various activities undertaken in manufacturing a product or providing a service. Hence, the analysis enables the accounting department to measure the efficiency of the organization as a whole as well as forms a basis for its increase. Cost Management Itis one of the foremost objectives of maintaining cost accounts. It includes the managers’ activities in both short term and long term in planning and cost controlling. Cost management also includes both cost control and cost reduction together. Determining Profits Cost accounting also assists in determining profits of each and every business activity. It produces statements in between intervals, which are then used by the management to determine profitability of the business. Cost accounting helps understand daily, weekly, or monthly quantities of the units produced and accumulated costs with appropriate analysis. Cost Control & Cost Reduction Maintaining cost records helps in cost control and cost reduction of business expenses, thereby increasing the business efficieney and profitability. Cost control and cost reduction primarily start with budgeting. Hence, cost control is an important factor in growing and maintaining business profitability, and it only comes with cost accounting. Also check out: Generally Accepted Accounting Principles for SSC CGL Importance of Cost AccountingHelps during trade depression and trade competition Facilitates the producer in price fixation apart from the demand, supply, and other activities Cost accounting records provide a reliable groundwork for estimates and tenders. Assists in channeling the production on the right lines by bifurcating the profitable and non- profitable activities in the business. Proper maintenance of cost records also help in eliminating wastage at every stage of production Costing enables easy comparison for different periods and various volumes of production Cost accounting helps in reducing costs in the long run as alternatives are easily available Get all the insights about Journal Entries for accounting prep! Components of Cost Now, let us understand the main components of cost. These are Material, Labour, and Expenses. Material (Inventory) Material is nothing but the substance that primarily helps in the process of production, It may be in a raw form or manufactured. Materials are of two types, that is, direct materials and indirect materials. They can be categorized into three different types of inventories as raw materials, work-in-progress, and finished goods. They are the materials and supplies consumed —_| They are used for purposes auxiliary to the business as it directly during the manufacturing of a product. | cannot be conveniently assigned to particular physical units. Examples: steel, corn, grain, lumber, plastic, Examples: Consumable stores, printing and stationery, natural gas, coal, minerals, oil, ete. oil and waste, ete, Labour Labour is the second most important component of cost after material. Labour in the form of human labour, is required to produce finished goods for the purpose of earning profit. The human efforts that are consumed in the production of goods is called labour. Labour can be direct as well as indirect. Itactively and directly takes part in the It is the one that is employed and consumed indirectly for production of a particular commodity. the purpose of carrying out tasks involved in the pl iol fices. ur cos tien of - S @ Cc OItis also called process labour, productive It cannot be specifically traced to a particular unit of labour, operating labour, direct wages, and output wages of stores such as keepers, time keepers, manufacturing labour. salaries of salesmen, directors’ fees, etc. Read here: Introduction to Financial Accounting notes! Expenses (Overheads) Expenses are the third category of important components of cost. Some of the most common expenses in the process of production include: Production or works overhead including factory staff Administration overheads including office staff Sales overhead including production and maintenance (advertising, cost of money, exhibitions, etc.) Distribution overhead ‘Maintenance and repair including office equipment and factory machinery ‘Supplies (office and factory) Utilities (gas, sewer, water, electricity, ete.) Other variable costs Salaries, wages, pensions, paycheck deductions Depreciation (of durable assets like machinery and office equipment) Other fixed expenses ‘Again, expenses or overheads can be direct or indirect. They are directly, wholly, and conveniently They are not directly, wholly, and conveniently allocated to specific cost units and cost centres. allocated to cost units and cost centres. Examples: Hire of special machinery for a Examples: Accounting and audit fees, business particular contract, cost of defective work, ete. permits, rent, utilities, telephone expenses, ete. All about Partnership Accounting: Types of Costs Now let's know about the different types or classifications of costs. They are as below: By nature or traceability 1, Direct costs Indirect costs4 5 7 ‘You might also be interested in: Auditing Theory study notes! ‘The above Cost Accounting study notes is intended to guide accounting aspirants with an interesting way to understand the topic for exam preparations. For more such relevant and engaging study resources, download the ‘Testbook App today and make a difference to your study experience! Get the app now to access mock tests, practice sets, live coaching, puzzles and quizzes, MCQs and much more at your fingertips! By function Production costs 2. Administration costs 3, Selling and distribution costs i, Research and development costs By behaviour Fixed costs Variable costs 3, Semi-variable costs By controllability Controllable costs , Uncontrollable costs By normality Normal costs 2 Abnormal costs By time Historical costs Predetermined costs By decision-making Differential costs Opportunity costs Relevant costs ep Replacement costs Shutdown costs Capacity costs soot Sunk costs g, Other costs Cost Accounting FAQs Q.1 What is cost accounting? Ans.t Cost Accounting implies the total of all expenditures involved in the process of production. Q.2 Why is cost accounting important?Cost accounting is important for cost control and cost reduction, analysis of trends, elimination of wastage, price determination, ete. Q.3 What are the objectives of cost accounting? Ans. Ascertaining costs, measuring and increasing efficiency, determining the selling price, determining the profits, and so on Q.4 What a the components of cost? Ans.4. Material, labour, and expenses (overheads) are the three main components of costs. Q.5 What are the different types of costs? Ans.5 These include fixed and variable, direct and indirect, normal and abnormal, semi-variable, controllable and uncontrollable, ete. Deca Selene er Co ratte fell 3 Be ep ee) aes General) conrterey TEST SERIES [ales The Complete Exam Preparation bali) akc ied