Module I- (Introduction to costing)

Cost
Cost refers to the total expense incurred on the production and sale of articles.
Costing
Costing simply refers to the techniques and process of ascertaining costs.
Cost Accounting
defined as a formal accounting system set up for recording analysing & & estimating costs.
General principles of cost accounting
● A cost should be related to its causes.
● A cost should be charged only after it has been incurred.
● The convention of prudence should be ignored.
● Abnormal costs should be excluded from cost accounts.
● Past costs not to be charged to future period.
● Principles of double entry should be applied wherever necessary.
Objectives/ Purpose of cost accounting
● To ascertain the cost.
● To control cost.
● To determine selling price.
● To measure efficiency.
● To control and reduce wastage.
● To provide cost data for fixation of selling price.
● To ascertain profitability of each product.
● To advise management on future expansion policies.
● To provide a perpetual inventory of stores and other materials.
Functions of cost accounting
● It helps ascertainment of accurate cost of each job,product &process.
● It helps in management in decision making.
● It helps in management in formulation of policies.
● It helps in optimum utilization of resources.
● It helps in fixing prices of goods or services.
● It helps in cost control.
● It helps in inter firm and intra firm comparison.
● It helps in implementation of incentive wage system.
● To provides cost data to government and trade union.
Scope of cost accounting
● Cost classification
● Cost recording
● Cost allocation
● Cost ascertainment
● Cost comparison
● Cost control
● Cost audit
● Cost reporting
Importance / Merits/ Advantages of cost accounting
● It helps in making estimates.
● It eliminates wastage.
● It makes comparison possible.
● It helps in inventory control.
● It provides data for periodical profit and loss account.
● It helps in determining efficiency.
● It provides continuous employment& high remuneration to employees.
Limitations/ Demerits/ Disadvantages of cost accounting
● It lacks uniform procedure.
● It is very costly.
● It cannot affordable to small business.
● Modern methods of costing is inapplicable to many industries.
● It is based on certain conventions and assumptions.
● Confusion regarding non-cost items.
Criticism or objections against cost accounting
● It is expensive
● It is unnecessary
● It is not suitable for all types of industries
● It is a failure as regards bringing desired results.
● It is mechanical
● It is stereotyped
Methods of costing (PY ESSAY)
•Job Costing :It refers to a system of costing in which cost are ascertained in terms of specific
jobs or orders which are not comparable with each other.
•Batch costing :It is a special type of job costing. It is used in factories where articles are
manufactured in definite batches.
•Contract costing :It is a method of costing mainly used in construction type of industries such
as buildings, roads, bridges, dams etc.
•Process costing :It is a method of costing used mainly in manufacturing where units are
continuously mass produced through one or more processes.
•Unit / Single costing :The unit cost is the price incurred by a company to produce, store and
sell one unit of a particular product.
•Operating costing :It is the mix of job costing and process costing. This method is applicable
where services are rented rather than goods produced.
•Operation costing :It refers to the determination of cost operations in place of processes. It is
used in industries like toy making, leather etc.
•Multiple costing :It is a method of costing used in industries where large number of
components are separately produced and assembled into a final products.
Types/ Techniques of costing
•Marginal costing :Marginal costing means the additional cost to produce each additional unit.
•Uniform costing :It is a system of costing under which several undertakings use the same cost
principles and practices.
•Direct costing :It is a method where only the variable manufacturing costs are assigned to
inventory and cost of goods sold.
•Absorption costing :This is the technique of costing where in the total cost is charged to cost
unit.
•Standard costing :It is defined as a benchmark measurement of resource usage, set in defined
conditions.
•Budgetary costing :A process of preparation, implementation and operation of budget is called
budgeting.
•Historical costing :It is the ascertainment of costs after they have been incurred. It aims at
ascertaining cost actually incurred on work done in the past.
•Departmental costing :When costs are ascertained by department, the method is called
departmental costing.
Cost unit
The unit cost is the price incurred by a company to produce, store and sell one unit of a
particular product.
Cost Centre
It is the smallest organisational sub unit for which separate cost collection is attempted.
Profit centre
It is a business unit or segment that generates revenues and incurs cost.
Cost Classification
•Direct Cost: Direct costs are those costs which are incurred for a particular product which can
be identified with a particular cost centre to cost unit.
•Indirect cost: Indirect costs are those costs which are incurred for the benefit of a number of
cost centre and cannot be identified with a particular cost centre.
•Fixed Cost: FC are predetermined costs that remains same throughout a specific period.
•Variable cost :It is a cost that changes the quantity of goods and services that
business produces changes.
•Semi variable cost : These are costs which are partly fixed and partly variable.
•Product cost: These are those costs which are traceable to the product.
•Period cost : These are those costs which are incurred for a period and treated as expense.
•Sunk cost : it means cost which was incurred in the past and not relevant for decision making.
•Opportunity cost: It is the value of a benefits scarified in favour of an alternative course of
action.
Elements of costing
1. Direct material :It refers to the raw materials that are directly used in the production process
of goods and services of the company.
2. Indirect material: Indirect material are those material that are used in the production process
but that are not directly traceable to the product.
3. Direct labour: It is the amount of effort exerted by employees to convert raw materials into
finished goods.
4. Direct expenses: It is the expense that is related to the purchase of product.
5. Overhead :It is the aggregate of the cost of indirect material, indirect labour and such other
expenses.
Factors considered before installation of costing system (PY ESSAY)
● History of business unit
● Nature of business unit
● Object of business unit
● Range of the product
● Area of control to be exercised
● Responsibility accounting
● Organizational factors
● Technical considerations
● Selling and distribution methods
● Uniformity
● Practical considerations
● Reporting
● Types and methods of costing
● Cost records and cost books
Difference between Financial accounting and Cost accounting

Financial Accounting Cost Accounting

The purpose of financial accounting is to keep The purpose of cost accounting is reducing
complete record of the financial transactions. and controlling cost.

These are accounts of whole business It is only a part of whole accounts.

Valuation of stock at cost or market price. Valuation of stock at cost price.

Financial accounting are concerned with Cost accounting are concerned with internal
external transactions. transactions.

Only historical costs are recorded. Both historical and predetermined costs are
recorded.

Difference between Cost accounting and Management accounting

Cost Accounting Management Accounting

It is used for management,shareholders & It is only for management.

The scope of cost accounting is narrow. The scope of management accounting is

Statutory audit is mandatory for big business. No statutory audit requirement.

It is used for cost control and cost reduction. It is only for management.

It considers only quantitative data. It considers both quantitative, qualitative data.