- What is the meaning of Costing? What are the advantages and limitations?
- Cost accounting is an essential part of accounting which has been developed to meet the managerial needs of business organizations.
Cost: Cost is the amount of resources used for something
which must be measured in terms of money.
Costing:
Costing is the technique
and process of ascertaining costs.
Cost
Accounting: It is a formal
system of accounting for costs by means of which costs of products and services
are ascertained and controlled.
Cost
Accountancy: Application
of costing & cost accounting principles methods & techniques to the
science, art and practice of cost control and ascertainment of profitability.
Advantages
of Costing:
(I)
Advantages of Management:
i.
Cost
accounts enable the management to ascertain the true cost of each article
process or contract or any other unit of production.
ii.
They
help in fixing price and in forming the price fixation policy particularly when
an industry produces several commodities.
iii.
They
help management in the retention and prevention of wastes, leakages, and
inefficiencies.
iv.
They
provide management with a means of control overall costs including control on
materials.
v.
They
distinguish unprofitable from profitable activities.
(II)
Advantages of Employees: The
personal of many business enterprises have benefited by the establishment of
incentives in the form of piece rates and bonus plans, which may be used to compensate all classes of
workers including supervisors, clerks, departmental heads and major executives.
Personal directors and plant supervisors are depending more and more on data
supplied by cost accounts in their rating of employees and in their delegation
of responsibility for important tasks.
(III)
Advantages of Creditors:
It has become a policy of many banks that no loans will be made to industrial
units unless such concerns have complete cost accounting system which produce
cost reports showing satisfactory trends. In this way costing helps to
creditors.
(IV)
Advantages to the Public Enterprises: Public Enterprises lack the profit motive and personal
interest. So the efficiency of public enterprises can be measured only through
a systematic collection of costing data and its study. Every public undertaking
maintains a costing department to secure economy and efficiency in production.
This serves a guide in price fixation and to control materials supplies etc.
(V)
Advantages to the Public: Cost
accountants aid in reducing and controlling costs which means supplying of
goods to the consumers at lower prices.
(VI)
Advantages to the Government: Cost accounts enable the assessment of income tax, excise duty etc. It
also helps in the preparation of five year plans for economic development.
Limitations
of Costing:
(1)
Unnecessary: It is often argued that costing system in the
industries would be an absolute unnecessary expenditure. In this age of
competition every manufacturer should know the exact cost of each article made.
But also of each process involved in its production. So that his selling prices
may be reasonablely fixed. Besides every manufacturer wishes to maximize his
profits by reducing the cost of production to the minimum by applying costing
techniques. Therefore it is not true to say that a costing system is
unnecessary.
(2)
Expenses: It is argued that the expenditure involved in
installing and maintaining a costing system is very heavy. The system to be adapted
to a particular industry should be adapted to the requirements of that industry
after careful study. It should be simple, elastic and capable of adaptation to
change in circumstances. It should produce a benefit and commensurate with the
expenditure involved. If the above mentioned points are come in the reality
while introducing a system of costing is not expense.
(3)
Inapplicability: In certain unique or special industries to
which modern methods of costing cannot be applied, some methods of costing can
always be devised to suit to some extent. Almost any form of industry in the
world. If the introduction of modern method of costing is not possible and
practicable, the working program to ascertain and control costs is always
possible.
(4)
Failure in many cases: There may be various reasons for failure
of costing in the industry:
(a)
Lack
of co-operation among staff.
(b)
Late
obtaining of cost data.
(c)
Not
comparing the actual results with anticipatory results etc.
If any defects are rectified cost
accounting will be proved as successful and helpful in many ways to a
manufacturing concern.
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- State the steps involved in installation of a costing system?
A:
prepare a uniform costing
method is very difficult. The basic principles of costing are fairly definite;
their application varies from industry to industry. So, before installing a
costing system in any firm. All aspects of the firm should be thoroughly
studied.
The following steps are to be taken before
introducing costing system in an organization.
(1)
Study of the organization:
The nature of the business, the powers of
the managers. Technical
Aspects are to be studied. Further the
methods of material control, time recording and methods of wage payment etc.,
should be studied.
(2)Determination of costing method:
Basing on the above study
suitable costing system should be decided. The system selected should be easy.
It should go along with the production process.
(3)Determination of cost rates:
After selecting the suitable
costing system the cost accountant should decide cost rates. Rules should be
framed for collection, distribution and analysis of costs accurately and
quickly.
(4)Installation of costing system:
Costing system will not be
successful without the co-operation of the managers. Before introducing this
system their co-operation should be taken. Costing system should be introduced
gradually existing system should be changed only in unavoidable circumstances.
(5)Cost office:
Cost office should be wearer
to the factory. Sufficient number of staff should be appointed in the cost
office. This office should send reports quickly and accurately. It should
maintain stores ledger, labour accounts and over-heads. It should also submit reports to management for cost control.
(6)Cost office and other departments:
Cost office should be an
independent department. Cost accountant is answerable directly to GM or MD.
Cost office must be useful to various levels in the organization.
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- Write the objectives or importance or aims of costing?
- Cost accounting is an essential part of accounting which has been developed to meet the managerial needs of business organizations.
Cost: Cost is the amount of resources used for
something which must be measured in terms of money.
Costing:
Costing is the technique
and process of ascertaining costs.
Cost
Accounting: It is a formal
system of accounting for costs by means of which costs of products and services
are ascertained and controlled.
Cost
Accountancy: Application
of costing & cost accounting principles methods & techniques to the
science, art and practice of cost control and ascertainment of profitability.
The objectives of cost
accounting may be divided into three types.
- Cost ascertainment 2. Cost control 3. Other objectives
(1)Cost
Ascertainment:
The main objective of costing is cost ascertainment.
It implies the following:
(a) collection
of expenses:
There are various systems of costing i.e.,
historical costs, estimated costs, standard costs for collection of expenses.
(b)Linking the production to expenses:
There are various techniques like
absorption costing and marginal costing for linking production with the
expenditure.
(c)Measurement
of production:
There are various methods of costing like
process costing, job costing, and output costing for measuring the quality of
production.
(2)Cost
control:
Another important object of
costing is cost control. There are various methods to ensure cost control.
·
Setting
up of standards and budgets for expenditures and production performance.
·
Comparing
the actual with standards to find out variation.
·
Analysis
the reasons for such variations.
·
Taking
corrective action to eliminate variations.
(3)Other
objectives:
·
To
assist the management in determining the selling price.
·
Help
the management to prevent the wastage in material, man and machinery.
·
To
facilitate the presentation of financial and other statements very quickly.
·
Help
the management for formulating the operational policies such as:
A.
Determination
of cost volume profit relationship.
B.
Shutting
down or operating at loss.
C.
Making
or buying from outside suppliers.
D.
Replacing
the old production methods by improved methods.
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4.
Describe briefly the different methods of
costing?
A.
It
is essential to devise a costing system suiting the requirements of business and industry and therefore,
there is no one system that will suit all business. There are different methods
of costing for different industries. This is because the nature of work carried
out by different industries varies industries can be grouped into two basic
types.
I.
Industries
doing job work.
II.
Industries
engaged in mass production of a single product or identical products.
Incase
of job industries each job needs special treatment, and production is strictly
according to customer’s specifications. For example printing press,
construction industry etc. incase of mass production industries, firms,
manufacture identical products e.g. chemical plants, paper etc,. The
manufacturing operations are grouped into distinct processes and are
accumulated for each process separately.
The
cost method will depend on the type of manufacture and nature of industry. For
these basic types of industries there are two general types of cost accounting
system for job industries job costing and mass production industries for
process costing.
(A)Job
Costing:
This is a method where costs are collected and
accumulated for each job separately. This is done because each job requires
different work and production is according to customer’s specifications.
Industries where this method of costing is used are printing presses, ship,
building, repair shops etc.
There
are some methods which are based on the principle of job costing, but they vary
due to special characteristics such methods are:
(1)
Contract or Terminal Costing:
This
method is applied to ascertain the costs incurred on each contract separately.
This is used in industries carrying out the building or construction work.
Contract is a big job.
(2)
Batch Costing:
Under this method, orders for like products are
arranged in convenient batches and each batch is treated as one job and cost is
calculated accordingly. Cost is collected for each batch separately as in the
case of job costing. This method is mainly applied in garments manufacture,
spare parts and component manufacture.
(B)
Process Costing:
This
method is used in mass production industries, having continuous production of
uniform standard products. The cost is calculated process wise or department
wise. Cost of each department or process is divided by the quality of
production to arrive at cost per unit. Such industries are paper, soap,
chemicals, sugar, food products etc.
Other
methods which are based on the principle of process costing but vary due to
special characteristics are:
(1)Operation
Costing:
This
is a refinement and more detailed application of process costing. This involves
costing by every operation instead of a process. This is used where the
manufacturing process consists of a number of distinct operations. This method
provides minute analysis of costs and ensures greater accuracy and better
control.
(2)Single
or Output or Unit Costing:
This method is applied where production is uniform and
consists of only a single product or two or three types of similar products
with variations only in size, shape, quality etc. The total cost is divided by
the number of units produced to determine the cost per unit. This method is
applied in industries like mines, quarries, oil drilling etc.
(3)Operation
Costing:
This method is applicable to undertakings that render
services. This is used to determine the cost rendering services by airways,
railways, road transport etc, for example Transport Company is interested in
knowing the cost of carrying one ton of goods per km, or the cost of carrying
one passenger per km. It is similar to unit costing. The only difference being
that in place of goods, the cost of services is determined in operating
costing.
(4)Multiple
or Composite Costing:
This involves the application of more than one method
of costing in respect of the same products. In the case of car manufacturing
the cost of each part of car may be ascertained by using batch costing and for
cost of assembling the parts single or output costing method may be applied.
This method is applied in industries like television, cycle, airplanes etc.
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5.
What are the fixed cost features?
A. 1.
Fixed cost represents the constant expenditure during a period regardless of
the volume of production during that period.
2.
Fixed costs are not absolutely fixed. For example if a concern decides to go
for additional equipment, building and staff fixed cost also increases.
3.
Fixed cost per unit of production varies with the volume with increase in
volume Fixed cost also increased and with the decrease in volume, Fixed cost
also decrease.
4.
Fixed cost are large, uncontrollable as they are not influenced by the action
of a specified member of an undertaking. For example a foreman does not have
control over the fixed cost of his department.
5.
Change in the basic price level effect the Fixed costs of fixed overheads. For
example, revision of pay scale of employees will affect the fixed cost.
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6. Write the differences between Cost
Accounting and Financial Accounting?
A. Cost
Accounting:
The purpose of
cost accounting is to analyse the expenditure so as to ascertain the cost of
various products manufactured by the firm and fix the prices.
Financial
Accounting:
The
purpose of accounting is to ascertain the financial results i.e., profit or
loss in the operations during a specific period.
Cost Accounting
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Financial Accounting
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Object
The main
object of cost accounting is to determine and record the cost per unit of
output.
Nature
In cost
accounting both the present and past figures are considered for cost
determination.
Scope
The scope of
cost accounting is limited to ascertainment of cost.
Principles
Cost
accounting has certain principles and procedures and proformas for recording
and analyzing the data.
Usage
Cost
accounting information is useful to both internal & external parties.
Focus
Cost
accounting is concerned only with cost determination and cost control.
Audit
Cost accounts
optional audit
History
Cost accounting
has been in use since industrial revolution.
Implementation
Costing can be
installed without management accounting.
Statutory
obligation:
Costing can be
installed without management accounting
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The main
object of financial accounting is to provide information in the form of
profit and loss account and balance sheet.
It is
concerned almost exclusively with historical records i.e., transactions which
have already taken place.
Financial
accounting covers only that information which can be measured in terms of
money.
Financial
accounting is governed by generally accepted accounting principles and
conventions.
Financial
accounting is useful to outsiders like creditors, bankers, investors,
government etc.
Financial
accounting reports reveal what had happened in the past.
Financial
statement such as profit and loss a/c and Balance sheet are subject to the
verification of statutory audit under company act.
Financial
accounting has been in use since industrial revolution.
Financial
accounting can be installed without Cost and management accounting.
The
preparation of financial accounting is a statutory obligation. Financial statement should be prepared in the formats by law
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