Costing accounting is branch of accounting and has been developed due to limitations of financial accounting. Financial accounting is primarily concerned with record keeping directed towards the preparation of Profit and loss account and balance sheet. It provides information regarding the profit and loss that the business enterprise is making and also its financial position on a particular date. The information concerning the business enterprise is helpful to management to control in a general way the major functions of a business viz., finance, administration, production and distribution but details regarding operating efficiency of these divisions are lacking. In fact, the development in the field of cost accounting is so quick and fields covered by it are are expanding so much in magnitude that it becomes difficult for the management to lay down management policies, to guide the management decisions or evaluate operating management performance with the information provided by financial accounting.
Limitations of Financial accounting
The following limitations of financial accounting have led to the development of cost accounting:
1.No clear idea of operating efficiency: Financial accounting does not give clear picture of operating efficiency when prices are rising or decreasing on account of inflation or trade depression. It is possible that profits may be more or less not because of efficiency or inefficiency but because of inflation or trade depression.
2.Weakness not spotted out by collective results: Financial accounting discloses only the net result of the collective activities of a business as a whole. It does not indicate profit or loss of each department, job, process or contract. It does not disclose the exact cause of inefficiency i.e., it does not tell where the weakness is because it discloses the net profit of all the activities of a business as a business as a whole. It can be compared with a reading on a thermometer. A reading of more than 98.4° or less than 98.4° discloses that something is wrong with human body but the exact disease is not disclosed. Similarly,loss or less profit disclosed by the profit and loss is a signal of bad performance of the business but the exact cause of such performance is not known.
3.Not helpful in the price fixation. In financial accounting costs are not available as an aid in determining prices of the products, services, production order and lines of products.
4.No classification of expenses and accounts. In financial accounting there is no such system by which accounts are classified so as to give data regarding costs by departments, processes, products in the manufacturing divisions; by units of product lines and sales territories; by departments, services and functions in the administrative division. Further expenses are not classified as to direct and indirect items and are not assigned to the products at each stage of production to show the controllable and uncontrollable items of overhead costs.
5.No data for comparison and decision making. It does not supply useful data to management for comparison with previous periods and for taking various financial decisions as introduction of new products, replacement of labour by machines, price in normal or special circumstances, producing a part in the factory or buying it from outside market, production of a product to be continued or given up, priority accorded to different products, investment to be made in new products or not etc.
6.No control on cost .It does not provide for a proper control of materials and supplies, wages,labour and overheads.
7.No standards to assess the performance. In financial accounting there is no well developed system of standards to appraise the efficiency of the organization in the use of materials, labour and overhead costs by comparing the work of labourers , clerks,salesmen and executives which should have been accomplished in producing and selling a given number of products in an allotted period of time. It does not provide information to assess the performance of various persons and departments and to see that the costs does not exceed a reasonable limit for a given quantum of work of the requisite quality.
8.Provides only historical information. Financial accounting is mainly historical and tells about the cost already incurred. It does not provide day-to-day cost information to the management for making effective plans for the coming year and the period after that as financial data are summarized at the end of the accounting period.
9.No analysis of losses. It does not provide complete analysis of losses due to defective material, idle time, idle plant and equipment. In other words,no distinction is made between avoidable and unavoidable wastage.
10.Inadequate information for reports. It does not provide adequate information for reports to outside agencies such as banks, government, insurance companies and trade associations.
11.No answer for certain questions. Financial accounting will not help to answer such questions as -(a)Should an attempt be made to sell more products or is the factory operating to capacity? (b)If an order or contract is accepted, is the price obtainable sufficient to show profit? (c)If the manufacture or sale of product A were discontinued and efforts made to increase the sale of B,what would be the effect on the net profit? (d)Why the profit of last year is of such a small amount despite the fact that output was increased substantially? (e)If a machine is purchased to carryout a job,at present done by hand, what effect will this have on profits? (f)Wage rates having been increased by 50paise per hour, should selling price be increased, and if so, by how much?
Meaning of Costing and Cost Accounting
Costing is a technique and process of ascertaining costs. This technique consists of principles and rules which govern the procedure of ascertaining the cost of product/services. The process of costing includes routines of ascertaining costs by historical or conventional costing, standard costing or marginal costing.
Cost Accounting is the classifying, recording and appropriate allocation of expenditure for the determination of the costs of products or services, and for the presentation of suitably arranged data for purposes of control and guidance of management. It includes the ascertainment of the cost of every order, job, contract, process, service or unit as may be appropriate. It deals with the cost of production, selling and distribution. It is thus the provision of such analysis and classification of expenditure as will enable the total cost of any particular unit of production or service to be ascertained with reasonable degree of accuracy and at the same time to disclose exactly how such total cost is constituted (i.e. the value of material used, the amount of labour and other expenses incurred) so as to control and reduce its cost. Thus, cost accounting relates to the collection, classification, ascertainment of cost and its accounting and control relating to the various elements of cost. It establishes budgets and standard costs and actual cost of operations, process, departments or products and the analysis of variances, profitability and social use of funds . According to Kohler, "Cost Accounting is the branch of accounting dealing with the classification, recording, allocation, summarising and reporting of current and prospective costs".
Differences between costing and cost accounting pdf. click here.
Thus, Cost Accounting has the following features:
(a)It is a process of accounting for costs.
(b)It records income and expenditure relating to production of goods and services.
(c) It provides statistical data on the basis of which future estimates are prepared and quotations are submitted.
(d)It is concerned with cost ascertainment and cost control.
(e)It establishes budgets and standards so that actual cost may be compared to find out deviations or variances.
(f)It involves the preparation of right information to the right person at the right time so that it may be helpful to the management for planning, control and decision making .
Meaning of Cost Accountancy
Cost Accountancy is the application of costing 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 therefrom for the purposes of managerial decision making. Thus,cost accountancy is the science, art and practice of a cost accountant. It is science because it is a body of systematic knowledge having certain principles which a cost accountant should possess for proper discharge of his responsibilities.
Differences between cost and management Accounting pdf
Scope or Functions of Cost Accountancy
The scope of accountancy is very wide and includes the following:
(i) Cost Ascertainment. It deals with the collection and analysis of expenses, the measurement of production of the different products at the different stages of manufacture and the linking up of production with the expenses. In fact, the varying procedures for the collection of expenses give rise to the different systems of costing as Historical or Actual costs, Estimated Costs, Standard costs etc. Again the varying procedures for the measurement of production have resulted in different methods of costing such as Specific Order Costing, Operation Costing etc For linking up of production with the expenses the different techniques of costing such as Marginal Cost Technique ,the Total Cost Technique, Direct Cost Technique etc have been evolved. All the three i.e. systems, methods and techniques can be used in one concern simultaneously.
(ii)Cost Accounting. It is the process of accounting for cost which begins with recording of expenditure and ends with the preparation of statistical data. It is formal mechanism by means of which costs of products or services are ascertained and controlled. Cost accounting is helpful to the management in decision making. Decision making requires,apart from other information, cost information which is provided by cost accounting. Cost can be ascertained either by standard costing or estimated costing. If the cost and financial accounts are kept separately then their reconciliation is also to be done in order to verify the accuracy of both sets of accounts.
(iii)Cost Control. Cost control is the guidance and regulation by executive action of the costs of operating an undertaking. It aims at guiding the actual towards the line of targets; regulates the actuals if
Objectives of cost Accounting
The objectives of cost accounting are ascertainment
Of cost ,fixation of selling price, proper recording and presentation of cost data to management for
Measuring efficiency and for cost control. The aim is
to know the methods by which expenditure on materials, wages and overhead is recorded, classified and allocated so that the cost of products and services may be accurately ascertained; these costs may be related to sales and profitability may be determined. Yet with the development of business and industry, its objectives are changing day by day. The following are the main objectives of cost accounting:
(a) To ascertain the cost per unit of the different products manufactured by a business concern.
(b)To provide a correct analysis of cost both by process or operations and by different elements of cost.
(c)To disclose sources of wastage whether of material, time or expense or in the use of machinery, equipment and tools and to prepare such reports which may be necessary to control such wastage.
(d)To provide requisite data and serve as a guide to price fixing of products manufactured or services rendered.
(e)To ascertain the profitability of each of the products and advise management as to how these profits can be maximized .
(f)To exercise effective control of stocks of raw materials, work-in-progress ,consumable stores and finished goods in order to minimize the capital locked up in these stocks.
(g)To reveal sources of economy by installing and implementing a system of cost control for materials, labour and overheads.
(h)To advise management on future expansion policies and proposed capital projects.
(i)To present and interpret data for management planning, decision-making and control.
Broadly speaking, the above objectives can be grouped under the following three heads :
(a)Ascertainment and analysis of cost and income by product, function and responsibility.
(b)Accumulation and utilisation of cost data for control purposes to have the minimum possible cost consistent with maintenance of quality. This objective is achieved through fixation of targets, ascertainment of actuals, comparison of actuals with targets, analysis of reasons of deviations between actuals and targets and reporting deviations to management for taking corrective action.
(c)Providing useful data to management for taking decisions.
Advantages of Cost Accounting
The main advantages of cost accounting are given below:
(i)Profitable and unprofitable activities are disclosed and steps can be taken to eliminate or reduce those activities from which little or no benefit is obtained or to change the method of production in order to make such activities more profitable.
(ii)It enables a concern to measure the efficiency and then to maintain and improve it. This is done
with the help of valuable data made available for the purpose of comparison. For example, if material spent upon a pair of shoes in 2005 comes to Rs.560 and for a similar pair of shoes the amount is Rs.600 in 2006,the increase may be due to increase in prices of material or more wastage in the use of materials or inefficiency at the time of buying or unnecessarily high prices paid.
(iii) It provides information upon which estimates and tenders are based.In case of big contracts or jobs, quotations cannot be given unless the cost of completing the contracts can be found out.
(iv)It guides future production policies. It explains the cost incurred and profit made in various lines of business and processes and thereby provides data on the basis of which production can be appropriately planned.
(v)It helps in increasing profits by disclosing the sources loss or waste and by suggesting such controls so that wastages, leakages and inefficiencies of all departments may be detected and prevented
Limitations of Financial accounting
The following limitations of financial accounting have led to the development of cost accounting:
1.No clear idea of operating efficiency: Financial accounting does not give clear picture of operating efficiency when prices are rising or decreasing on account of inflation or trade depression. It is possible that profits may be more or less not because of efficiency or inefficiency but because of inflation or trade depression.
2.Weakness not spotted out by collective results: Financial accounting discloses only the net result of the collective activities of a business as a whole. It does not indicate profit or loss of each department, job, process or contract. It does not disclose the exact cause of inefficiency i.e., it does not tell where the weakness is because it discloses the net profit of all the activities of a business as a business as a whole. It can be compared with a reading on a thermometer. A reading of more than 98.4° or less than 98.4° discloses that something is wrong with human body but the exact disease is not disclosed. Similarly,loss or less profit disclosed by the profit and loss is a signal of bad performance of the business but the exact cause of such performance is not known.
3.Not helpful in the price fixation. In financial accounting costs are not available as an aid in determining prices of the products, services, production order and lines of products.
4.No classification of expenses and accounts. In financial accounting there is no such system by which accounts are classified so as to give data regarding costs by departments, processes, products in the manufacturing divisions; by units of product lines and sales territories; by departments, services and functions in the administrative division. Further expenses are not classified as to direct and indirect items and are not assigned to the products at each stage of production to show the controllable and uncontrollable items of overhead costs.
5.No data for comparison and decision making. It does not supply useful data to management for comparison with previous periods and for taking various financial decisions as introduction of new products, replacement of labour by machines, price in normal or special circumstances, producing a part in the factory or buying it from outside market, production of a product to be continued or given up, priority accorded to different products, investment to be made in new products or not etc.
6.No control on cost .It does not provide for a proper control of materials and supplies, wages,labour and overheads.
7.No standards to assess the performance. In financial accounting there is no well developed system of standards to appraise the efficiency of the organization in the use of materials, labour and overhead costs by comparing the work of labourers , clerks,salesmen and executives which should have been accomplished in producing and selling a given number of products in an allotted period of time. It does not provide information to assess the performance of various persons and departments and to see that the costs does not exceed a reasonable limit for a given quantum of work of the requisite quality.
8.Provides only historical information. Financial accounting is mainly historical and tells about the cost already incurred. It does not provide day-to-day cost information to the management for making effective plans for the coming year and the period after that as financial data are summarized at the end of the accounting period.
9.No analysis of losses. It does not provide complete analysis of losses due to defective material, idle time, idle plant and equipment. In other words,no distinction is made between avoidable and unavoidable wastage.
10.Inadequate information for reports. It does not provide adequate information for reports to outside agencies such as banks, government, insurance companies and trade associations.
11.No answer for certain questions. Financial accounting will not help to answer such questions as -(a)Should an attempt be made to sell more products or is the factory operating to capacity? (b)If an order or contract is accepted, is the price obtainable sufficient to show profit? (c)If the manufacture or sale of product A were discontinued and efforts made to increase the sale of B,what would be the effect on the net profit? (d)Why the profit of last year is of such a small amount despite the fact that output was increased substantially? (e)If a machine is purchased to carryout a job,at present done by hand, what effect will this have on profits? (f)Wage rates having been increased by 50paise per hour, should selling price be increased, and if so, by how much?
Meaning of Costing and Cost Accounting
Costing is a technique and process of ascertaining costs. This technique consists of principles and rules which govern the procedure of ascertaining the cost of product/services. The process of costing includes routines of ascertaining costs by historical or conventional costing, standard costing or marginal costing.
Cost Accounting is the classifying, recording and appropriate allocation of expenditure for the determination of the costs of products or services, and for the presentation of suitably arranged data for purposes of control and guidance of management. It includes the ascertainment of the cost of every order, job, contract, process, service or unit as may be appropriate. It deals with the cost of production, selling and distribution. It is thus the provision of such analysis and classification of expenditure as will enable the total cost of any particular unit of production or service to be ascertained with reasonable degree of accuracy and at the same time to disclose exactly how such total cost is constituted (i.e. the value of material used, the amount of labour and other expenses incurred) so as to control and reduce its cost. Thus, cost accounting relates to the collection, classification, ascertainment of cost and its accounting and control relating to the various elements of cost. It establishes budgets and standard costs and actual cost of operations, process, departments or products and the analysis of variances, profitability and social use of funds . According to Kohler, "Cost Accounting is the branch of accounting dealing with the classification, recording, allocation, summarising and reporting of current and prospective costs".
Differences between costing and cost accounting pdf. click here.
Thus, Cost Accounting has the following features:
(a)It is a process of accounting for costs.
(b)It records income and expenditure relating to production of goods and services.
(c) It provides statistical data on the basis of which future estimates are prepared and quotations are submitted.
(d)It is concerned with cost ascertainment and cost control.
(e)It establishes budgets and standards so that actual cost may be compared to find out deviations or variances.
(f)It involves the preparation of right information to the right person at the right time so that it may be helpful to the management for planning, control and decision making .
Meaning of Cost Accountancy
Cost Accountancy is the application of costing 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 therefrom for the purposes of managerial decision making. Thus,cost accountancy is the science, art and practice of a cost accountant. It is science because it is a body of systematic knowledge having certain principles which a cost accountant should possess for proper discharge of his responsibilities.
Differences between cost and management Accounting pdf
Scope or Functions of Cost Accountancy
The scope of accountancy is very wide and includes the following:
(i) Cost Ascertainment. It deals with the collection and analysis of expenses, the measurement of production of the different products at the different stages of manufacture and the linking up of production with the expenses. In fact, the varying procedures for the collection of expenses give rise to the different systems of costing as Historical or Actual costs, Estimated Costs, Standard costs etc. Again the varying procedures for the measurement of production have resulted in different methods of costing such as Specific Order Costing, Operation Costing etc For linking up of production with the expenses the different techniques of costing such as Marginal Cost Technique ,the Total Cost Technique, Direct Cost Technique etc have been evolved. All the three i.e. systems, methods and techniques can be used in one concern simultaneously.
(ii)Cost Accounting. It is the process of accounting for cost which begins with recording of expenditure and ends with the preparation of statistical data. It is formal mechanism by means of which costs of products or services are ascertained and controlled. Cost accounting is helpful to the management in decision making. Decision making requires,apart from other information, cost information which is provided by cost accounting. Cost can be ascertained either by standard costing or estimated costing. If the cost and financial accounts are kept separately then their reconciliation is also to be done in order to verify the accuracy of both sets of accounts.
(iii)Cost Control. Cost control is the guidance and regulation by executive action of the costs of operating an undertaking. It aims at guiding the actual towards the line of targets; regulates the actuals if
Objectives of cost Accounting
The objectives of cost accounting are ascertainment
Of cost ,fixation of selling price, proper recording and presentation of cost data to management for
Measuring efficiency and for cost control. The aim is
to know the methods by which expenditure on materials, wages and overhead is recorded, classified and allocated so that the cost of products and services may be accurately ascertained; these costs may be related to sales and profitability may be determined. Yet with the development of business and industry, its objectives are changing day by day. The following are the main objectives of cost accounting:
(a) To ascertain the cost per unit of the different products manufactured by a business concern.
(b)To provide a correct analysis of cost both by process or operations and by different elements of cost.
(c)To disclose sources of wastage whether of material, time or expense or in the use of machinery, equipment and tools and to prepare such reports which may be necessary to control such wastage.
(d)To provide requisite data and serve as a guide to price fixing of products manufactured or services rendered.
(e)To ascertain the profitability of each of the products and advise management as to how these profits can be maximized .
(f)To exercise effective control of stocks of raw materials, work-in-progress ,consumable stores and finished goods in order to minimize the capital locked up in these stocks.
(g)To reveal sources of economy by installing and implementing a system of cost control for materials, labour and overheads.
(h)To advise management on future expansion policies and proposed capital projects.
(i)To present and interpret data for management planning, decision-making and control.
Broadly speaking, the above objectives can be grouped under the following three heads :
(a)Ascertainment and analysis of cost and income by product, function and responsibility.
(b)Accumulation and utilisation of cost data for control purposes to have the minimum possible cost consistent with maintenance of quality. This objective is achieved through fixation of targets, ascertainment of actuals, comparison of actuals with targets, analysis of reasons of deviations between actuals and targets and reporting deviations to management for taking corrective action.
(c)Providing useful data to management for taking decisions.
Advantages of Cost Accounting
The main advantages of cost accounting are given below:
(i)Profitable and unprofitable activities are disclosed and steps can be taken to eliminate or reduce those activities from which little or no benefit is obtained or to change the method of production in order to make such activities more profitable.
(ii)It enables a concern to measure the efficiency and then to maintain and improve it. This is done
with the help of valuable data made available for the purpose of comparison. For example, if material spent upon a pair of shoes in 2005 comes to Rs.560 and for a similar pair of shoes the amount is Rs.600 in 2006,the increase may be due to increase in prices of material or more wastage in the use of materials or inefficiency at the time of buying or unnecessarily high prices paid.
(iii) It provides information upon which estimates and tenders are based.In case of big contracts or jobs, quotations cannot be given unless the cost of completing the contracts can be found out.
(iv)It guides future production policies. It explains the cost incurred and profit made in various lines of business and processes and thereby provides data on the basis of which production can be appropriately planned.
(v)It helps in increasing profits by disclosing the sources loss or waste and by suggesting such controls so that wastages, leakages and inefficiencies of all departments may be detected and prevented
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