BBA Study Material to Cost Accounting Introduction to Cost Accounting short notes of Necessity for Cost Accounting System
necessity for Cost Accounting System
Cost accounting is a conscious and rational procedure by accountants for accumulating costs and relating such costs to specific products or departments for effective management action. Cost accounting establishes budgets, standard costs and actual costs. Cost accounting is a set of procedures used in refining raw data into usable information for management decision making. For ascertainment of cost of products and services and its profitability. Cost accounting is a management information system which analyses past, present and future data to provide the basis for managerial decision making. A company having a proper cost accounting system will help the management in the following ways.
- The analysis of profitability of individual products, services or jobs.
- The analysis of profitability of different department or operations.
- The analysis of cost behaviour of various items of expenditure in the organization. This will help in future cost estimation with reasonable accuracies.
- It locates differences between actual results and expected results. Such differences can be also traced to the individual cost centers with the efficient cost system.
- It will assist in setting the prices so as to cover costs and generate an acceptable level of profit.
- The effect on profits of increase or decrease in output or shut-down of a product line or department can be analysed with by adoption of efficient cost accounting system.
- The costing records serve to analyse the final accountants of a company i.e., the manufacturing, trading and profit and loss accounts, in such a way as to give a detailed explanation of the sources of profit or loss.
- Cost accounting data generally serves as a base to which the tools and techniques of management accounting can be applied to make it more purposeful and management oriented.
- The cost ascertainment, allocation, distribution can be efficiently made under efficient costing system.
- Cost records are the base for the management information systems.
- The cost system generates regular performance statements which management need for control purposes.
- Cost accounting system is not only applicable to manufacturing organizations or functions but also extended to service organizations and functions.
- Cost comparisons between different departments, machines and alternative processes help management to maintain maximum efficiency is possible with the adoption of efficient costing system.
- The costing information will help in making reliable estimates and will also help in submission of tenders.
- Costing checks recklessness and avoids occurrence of mistakes.
- It provides invaluable aid to management in performing its functions of planning, evaluation of performance, control and decision making.
- It facilitates delegation of responsibility for important tasks and rating of employees.
- It enables to distinguish profitable and non-profitable activities.
- It helps in determination of break-even point i.e., the level of activity where the firm reaches no profit no loss situation.
- It aids in determining and enhancing levels of efficiency and eliminates wastage of men, material, machines and money. All sorts of wastages are also minimized.
- The costing information will find a way out in periods of trade depression and competition.
- It provides data for preparation of periodical profit and loss account.
- It facilitates the assessment of excise duty, customs duty, income-tax.
- It helps the government in formulation of policies regarding industry, import, export, taxation, etc.
- It help the government in fixation of administered prices, tariff protection, wage level fixation etc.
- The costing system will aim at increase in operational efficiency and cost reduction, which helps the consumers in getting reduced prices.
- It discloses the relative efficiencies of different workers which facilitate to frame suitable wage/ reward polices.
- The efficiency of public enterprises can be compared with the private sector if cost data is available.
- The operation of cost system enables cost audit which will bring out inefficiencies and frauds.
- Basing on cost information, the limited resources will be allocated to maximize profitability of the organization.
- Reliable capital investment decisions can be taken if it is supported with cost data.
Cost accounting is a system of foresight and not a post-mortem examination, it turns losses into profits, speeds up activities and eliminate wastes. A cost accounting system that simply records costs for the purpose of fixing sale prices has accomplished only a small part of its mission. Cost accounts are key to economy in manufacture and are indispensable to the intelligent and economical management of a factory. Cost accounting is becoming more and more relevant in the ever growing economics scenario. Cost accounting becomes an important aid to modern management.
BBA Study Material to Cost Accounting Introduction to Cost Accounting short notes of Essential of Good Cost Accounting
Essential of Good Cost Accounting System
A good costing system will consist of the following characteristics.
- The costing system adopted in a particular organization must suit its nature and size of business and its information needs.
- The costing system must be economical to the organization and the benefits derived from the system should be more than its cost of installation and operation.
- The system should be more flexible enough to take care of changing business situations and information needs of the organization.
- The system should be simple to understand and easy to operate. The user of costing data should be convinced of the costing system from which the data is derived.
- The costing system should be devised with the co-ordinate efforts of all the concerned departments and their staff. This will reduce the difficulty in implementation of cost system.
- The costing should ensure proper system of accounting for materials, labour and overheads and proper classification of transaction should be done at the level of recording.
- Adoption of activity based costing system will increase the accuracy in allocation, apportionment and absorption of overheads, will leads to correct ascertainment of cost per unit of product or service.
- Integration of financial accounting and cost accounting systems will avoid duplication of work. the financial and cost accounts should be inter-locked together and should be reconciled periodically.
- The costing system should clearly mention the details of records to be maintained and the degree of accuracy of data required.
- Before devising a costing system, the need and objectives of the system should be identifies.
- Since the costing system is for internal control purpose, it should meet the requirement and its information needs.
- The costing system should concentrate more on ascertaining the significant variables of the manufacturing unit which are amenable to control and effect the concern . for examples , wages are amenable for work, wages system, input requirements, information needs, financial accounting system etc.
- Before a costing system is devised and adopted, thorough study should be conducted on production process, methods of work, wages system , input requirement, information needs, financial accounting system etc.
- Wherever possible, concepts like management by exception, responsibility accounting etc. should be adopted into the costing system.
- All forms and performance should be adopted to minimize clerical work and formulate efficient system of material control and adequate wage procedure.
- The costing system must take care of the importance of comparability of data, with previous period’s data, with competitors’ data with industry averages.
- The costing should fix-up the duties and responsibilities of costing department staff and the co-operation that can be sought from other function/ departments.
Essential factors for goods Cost Accounting System
In designing and installation of a good cost accounting system the following factors should give due consideration.
- The information needs of the management and the level of details needed.
- The frequency of the information to be provided.
- The factor layout and production process, method of production and type of process.
- The level of control to be exercised over production and cost centres.
- The nature of row material and labour used in the process.
- The organization structure and degree of decentralization.
- The speed and accuracy in requirement of information.
- The information needs of different cost centres.
- The relative size of the cost unit and cost centres.
- The level of integration of cost and financial accounts desired.
- The requirement of uniformity of accounting for comparability of data with other units in the same industry.
- The level of mechanization and computerization needed.
- Standardization of records and accounting procedures and control systems.
- The level of application of costing techniques viz, standard costing budgetary control and marginal costing.
- Cost minimization without effecting the efficiency of information needs.
- The management’s intention and the co-operation of workers and staff needed in installation of costing system.
- Implementation of proper wage system and inventory valuation, stories issues.
- The cost behaviour and element wise classification of costs and selection of equitable basis for allocation, apportionment and absorption of overheads.
- Cost accounting system should be simple and easy to operate.
- The expenses of the costing should commensurate with the benefits of installation.
BBA Study Material to Cost Accounting Introduction to Cost Accounting short notes of Practical Difficulties In Installation of Costing System
Practical Difficulties in Installation of Costing System
The practical difficulties that are expected at the time of installation of costing system, are summarized below.
Lack of support from top management
The basic objective of cost accounting system is to provide necessary information to the internal management for the purpose of problem solving, decision making and control. Without necessary support and recognition from the top management , the very purpose of cost system in vitiated.
Resistance from existing accounting staff
The existing accounting staff may resist introduction of cost accounting system in the organization due to fear of loosing job recognition and importance after the implementation of the system.
Lack of co-operation from other departments
the employees of other departments may not co-operate for the installation of cost accounting system due to fear of increase in work load, bring-out inefficiency etc.
Resistance from operating level workers
The foremen, supervisors, workers and other operating level staff may resent the introduction of cost system on the ground that it will increase their job responsibilities and paper work and may fear that it may cause change in wage structure.
Shortage of trained staff
The installation and implementation of cost system requires trained, qualified and experience staff which may be shortage.
uneconomical cost system
Sometimes the detailed cost system proposed to be installed may cause substantial and operating cost.
Suggestions to overcome Practical Difficulties
The steps to be taken to avoid the above said practical difficulties while installation of a cost system in the organization are as follows.
- The management should be convinced of the benefits which can derive by installation and operation of a cost system.
- Non-cooperation and can be overcome by explaining the simplicity and use of the system and should be ensured that the system will benefit the organization and increase its profitability. they should be given assurance that the system will not reduce the importance of existing staff.
- To overcome resistance, the existing staff should be properly trained to take up the responsibilities of the costing system.
- All levels of staff and managers in the organisation should be properly trained and made familiar with the costing procedures.
- The system should be simple to understand and easy to operate.
- The benefits derived from cost system should be more than the costs incurred on its installation and operation.
- A qualified and experienced cost accounting should be assigned with responsibility to achieve the desired objectives of the cost system. He should be capable of coordinating with other departments, and operating workers.
- The cost system designed and installed should meet specific requirements of the concern and it should reduce unnecessary paper work of the organisation.
- The accounting staff should be convinced that the cost system will only supplement the financial accounting system and it is not going to reduce the importance of existing accounting function.
- Regular meetings with accounting staff and user departments will clarify all doubts about the system and eliminate ambiguity.
BBA Study Material to Cost Accounting Introduction to Cost Accounting short notes of Limitation of Cost
Limitation of Cost Accounting
The cost accounting is subject to the following limitations.
- It present the base for taking the best decisions, but it does not give outright solution to the problem.
- Cost varies with purpose. Therefore, cost called for a certain purpose will not be suitable for other purposes.
- Cost accounting is not a exact science. It involves inherent elements of
- It lacks a uniform procedure.
- A suitable system is to be devised for each individual concern and it would be time consuming and expensive.
- Existence of numerous methods for apportionment and absorption of overheads, segregation of fixed and variable costs, division of costs into controllable and non-controllable costs, classification of costs into normal and abnormal costs, valuation of stocks, provision for depreciation etc. may lead to cost differences and it is difficult to ascertain true cost of product or service.
- Most of cost accounting techniques are based on some presumed notions.
- Different views are held for inclusion of certain items of cost in ascertainment of total cost.
- Many formalities are to be observed to obtained benefit from costing system. Small and medium concerns may not be in a position to install a costing system.
- If the system is not revised as per the changing circumstances, it will become a matter of routine forms and statements.
BBA Study Material to Cost Accounting Introduction to Cost Accounting short notes of Cost Centre
CIMA defines cost centre as ‘ a production or service, function, activity or item of equipment whose costs may be attributed to cost units. A cost centre is the smallest organizational sub-unit for which separate cost allocation is attempted.’’
Cost centre is a location, person or item of equipment for which cost may be ascertained and used for the purpose of cost control. From functional point of view, a cost centre may be relatively easy to establish, because a cost centre is any unit of the organisation to which costs can be separately attributed. A cost centre is an individual activity or group of similar activities for which cost are accumulated. For example in production departments, a machine or group of machines within a department or a work group is considered as cost centre. Any part of an enterprise to which costs can be charged is called as ‘cost centre’. A cost centre can be.
(a) Geographical i.e. an area such as production department, stores, sales area.
(b) An item of equipment e.g. a lathe, fork-lift, truck or delivery vehicle.
(c) A person e.g. a sales person.
A machine can be a cost centre by charging all costs relate to it. Those costs may be depreciation, maintenance, power, consumables, share of rent and establishment expenses, heating and lighting etc. a sales person can be treated as cost centre by charging all costs relating to him like salary, commission, travel expenses, postage and telephone, samples, entertainment expenses etc. the procedure of allocation of overheads involves identification of cost centers for which an item of expenditure is a direct cost. The establishment of cost centre will help to achieve the following.
- There is a clear-cut responsibility placed on a person who is held responsible for control of expenditure in his cost centre.
- Cost centre wise recovery of cost is possible , since costs are collected and accumulated in a cost centre and distributed over the products for recovery of incurred cost.
Types of Cost Centres
The cost centre are classified into the following.
- Personal and impersonal cost centre- A cost centre which consists of a person or group of person is called ‘personal cost centre’. Example : sales manager, works manager, etc. An impersonal cost centre consists of a location or item of equipment, production department, a machine or a group of machines.
- Production and service cost centre- production cost centre are engaged in production activity by conversion of raw material into finished production. Service cost centre are those which are ancillary to and render service to other production and service cost centre. For example, maintenance department is a service department provides service to other cost centers which include both production cost centre and service cost centre. A power house is a service generates and supplies power not only to production cost centre but also to other service cost centre.
- Process cost centre- a cost centre in which a specific process process or a continuous sequence of operations is carried out.
BBA Study Material to Cost Accounting Introduction to Cost Accounting short notes of Profit Centre
CIMA defines profit centre as ‘a segment of the business entity by which both revenues are received and expenses are incurred or controlled’.
A profit centre is any sub-unit of an organisation to which both revenues and costs are assigned, so that the responsibility of a sub-unit may be measured. Profit centre is a segment of the business entity by which both revenues are received and expenditures are caused are controlled. Such revenues and expenditure being used to evaluate segment performance. In profit centre, both inputs and outputs are capable of measurement in financial terms and it provides more effective assessment of the managers performance since both costs and revenues are measured in monetary terms. A division of a company which produce and markets the products may me called as ‘profit centre’. The performance of profit centre is evaluated in term of the fact whether the centre has achieved its budgeted profit.