Introduction

To Cost Accounting

Meaning and scope of Financial Accounting: The term Accounting refers RECORDING of financial transactions and PRESENTING them in a particular format.

Financial accounting involves preparation of Profit and loss account and Balance sheet, to determine the profit or loss earned by a firm in a given year,
It shows the financial position of the firm as on the day of preparation of Balance sheet.

Financial accounting helps us give a over all view of the profit or loss made by the firm.

Limitations of Financial Accounting : Financial accounting is not sufficient For several purposes, For example: Product selection, addition or dropping any product combination in case of a multi-product company. Measuring the output level of a product or products.

Determining the price of the product, If it should be revised, The price of a product should be increased or decreased.
Finding out the profit made by a particular product is sufficient as compared to earlier years.

Meaning of COST AND COST ACCOUNTING:

The term COST refers to The amount of expenditure, actual or notional, incurred on a product or service, or for attainment of a objective.

Cost can be any expense incurred, or a price paid for attaining the objective .

Cost accounting refers to recording of Cost.

Cost accounting refers to recording and appropriate allocation of expenditure for determining costs of product or services.

Meaning of costing: Costing refers to rules and principles we apply for ascertainment of costs.

Types of costing : Historical costing Standard costing Uniform costing Marginal costing

Historical costing: It refers to determining the costs after they have actually incurred. So in this method of costing the cost of production can be determined only after the production is complete. It refers to past data of expenditure. Standard costing: It refers to determining of standard costs and applying them and measuring the variations to control the cost of production. Uniform costing: In this method the trade associations fix a system followed by all the business units. It helps in interfirm comparisons.

Marginal costing: In this method of costing, total cost is classified into two categories fixed and variable cost. Fixed cost is not treated as product cost. Only variable cost is charged to the product. It helps the management in taking various policy making decisions. This method is also called Direct or variable costing.

Difference between financial accounting and cost accounting

Basis (i) Objective

Financial Accounting It provides information about the financial performance and financial position of the business. It classifies records, presents and interprets transactions in terms of money. It records Historical data.

Cost accounting It provides information of ascertainment of cost to control the cost and for decision making about the cost. It classifies, records, presents, and interprets in a significant manner the material, labor and overheads cost. It also records and presents the estimated/budgeted data. It makes use of both the historical costs and pre-determined costs..

(ii) Nature

iii) Recording of data

(iv) Users of Information The users of financial accounting statements are shareholders, creditors, financial analysts and government and its agencies etc.
(v) Analysis of costs and profits It shows the profit/ loss of the organization.

The cost accounting information is used by internal management at different levels.

It provides the details of cost and profit of each product, process job, contracts, etc. Its reports and statements are prepared as and when required There are not any set formats for presenting cost information

(vi) Time period

Financial Statements are prepared for a definite period, usually a year. A set format is used for presenting financial information.

(vii) Presentation of information

Objectives of cost accounting There is a relationship among information needs of management, cost accounting objectives, and techniques and tools used for analysis in cost accounting. Cost accounting has the following main objectives to serve: 1. Determining selling price, 2. Controlling cost 3. Providing information for decision-making 4. Ascertaining costing profit 5. Facilitating preparation of financial and other statements. 1. Determining selling price The objective of determining the cost of products is of main importance in cost accounting. The total product cost and cost per unit of product are important in deciding selling price of product. Cost accounting provides information regarding the cost to make and sell product or services. Other factors such as the quality of product, the condition of the market, the area of distribution, the quantity which can be supplied etc., are also to be given consideration by the management before deciding the selling price, but the cost of product plays a major role.

2. Controlling cost Cost accounting helps in attaining aim of controlling cost by using various techniques such as Budgetary Control, Standard costing, and inventory control. Each item of cost [viz. material, labour, and expense] is budgeted at the beginning of the period and actual expenses incurred are compared with the budget. This increases the efficiency of the enterprise.

3. Providing information for decision-making Cost accounting helps the management in providing information for managerial decisions for formulating operative policies. These policies relate to the following matters: (i) Determination of cost-volume-profit relationship. (ii) Make or buy a component (iii) Shut down or continue operation at a loss (iv) Continuing with the existing machinery or replacing them by improved and economical machines.

4. Ascertaining costing profit Cost accounting helps in ascertaining the costing profit or loss of any activity on an objective basis by matching cost with the revenue of the activity.

5. Facilitating preparation of financial and other statements Cost accounting helps to produce statements at short intervals as the management may require. The financial statements are prepared generally once a year or half year to meet the needs of the management. In order to operate the business at high efficiency, it is essential for management to have a review of production, sales and operating results. Cost accounting provides daily, weekly or monthly statements of units produced, accumulated cost with analysis. Cost accounting system provides immediate information regarding stock of raw material, semi finished and finished goods. This helps in preparation of financial statements.