BBA Study Material to Cost Accounting Introduction to Cost Accounting short notes of Types of Costing Systems
Types of Costing Systems
The important types of costing systems are discussed in brief as follows:
In this type of costing system, the costs are ascertained only after they have been incurred. The main objective of it is to ascertain costs that have been incurred in a systematic manner. The historical costs are used only for post-mortem examination of actual costs incurred and it would be too late to control. the actual figures can be compared only when the standards of performance exists.
under the absorption costing system all fixed and variable costs are allotted to cost unit and total overheads are absorbed according to activity level. In absorption costing system, fixed manufacturing overhead are allocated to products, and these are included in stock valuation. Therefore, valuation of inventories of finished goods and WIP includes manufacturing fixed cost and transferred to next period. Unlike manufacturing fixed overhead, the administrative overhead, selling and distribution overheads are treated as fixed cost and recorded only when they incurs. It is a traditional from of cost ascertainment. It is based on the principle that costs should be charged or absorbed to whatever is being costed- be it cost unit, cost centre- on the basis of the benefit received from these costs.
Direct costing is a method of costing in which the product is charged with only those costs which vary with volume. Variable or direct costs such as direct material, direct labour and variable manufacturing expenses are examples of cost charged to the product. All indirect costs are charged to profit and loss account of the period in which they arise. Indirect costs are disregarded in inventory valuation.
Under marginal costing, costs are classified into fixed and variable costs. Variable costs are charged to unit cost and the fixed costs attributable to the relevant period are written-off in full against the contribution for that period. Contribution margin indicates the recovery of fixed cost before contributing towards the operational profit. This technique is widely used for internal management purpose for decision making rather than for external reporting.
Standard costing is the ascertainment and use of standard costs and the management and analysis of variances. Standard cost is a predetermined cost which is computed is advance of production on the basis of a specification of all the factors affecting costs and used in standard costing. Its main purpose is to provide a base for control through variance accounting, for valuation of stock and work – in – progress and, in some cases, for fixing selling prices.
Uniform costing is not a distinct method of costing. It is the adoption of identical costing principles and procedures by several units of the same industry or several undertaking by mutual agreement. It facilitate valid comparisons between organisations and helps in elimination of inefficiencies.
BBA Study Material to Cost Accounting Introduction to Cost Accounting short notes of Method of Costing
Methods of Costing
Over many years, various cost accounting methods have evolved to record the manufacturing costs to suit particular industries, and it is the need for the organisations to establish a suitable cost accounting system for their business to facilitate the recording and collection of costs ; allocation; apportionment and absorption into products and services; analysis and control of costs etc. But whatever the costing method is used the basic costing principles relating to collection, analysis, allocation, apportionment and absorption is used. The costing methods are broadly categorized into two. (1) Specific order costing, (2) Continuous operation costing. The classification of costing method is shown in figure
BBA Study Material to Cost Accounting Introduction to Cost Accounting short notes of Specific Order Costing
Specific order Costing
CIMA defines specific order costing as ‘the basic costing method applicable where the work consists of separate contracts, jobs or batches, each of which is authorised by a special order or contract.’
Specific order costing methods are used by business organisations which involve in make/ assemble/ construct jobs or products to individual customers specific orders. The specific order costing is further classified into the following:
Job costing is applicable where work is undertaken to customer’s special requirement and each order is of comparatively short duration. Job costing method is applied in manufacturing concerns where production is carried on demand or order of customers such as machine tool manufacture, printing, general engineering etc.
contract costing is applicable where there is an agreement between contractor and contractee for accomplishment of work or job, which refer to construction work, such as construction of building, bridge, road etc. The construction work is accepted to meet the special requirements of each individual customer and the work is expected to be continued for a long period. Another important feature is that, construction work is commenced on site and not at the premises of the contractor.
This method is suited in cases where a customer orders certain quantity of identical items or a batch of identical parts or products produced within a concern for replenishing stocks.
BBA Study Material to Cost Accounting Introduction to Cost Accounting short notes of Continuous Operation Costing
Continuous Operation Costing
CIMA defines continuous operation costing as ‘the basic costing method applicable where goods or services results from a series of continuous or repetitive operations or processes to which costs are charged before being averaged over the units produced during the period.’
Where organisations which involve in mass production of products, through continuous operations, which will then be sold from stock and will not be produced to the specific requirements of the customers. The important feature of continuous operation costing is that, the process involve in production of identical units of output and total costs are divided by number of units produced to give the average cost per unit. The continuous operation costing is classified into the following.
Process costing is used to ascertain the cost of each stage of manufacture where material is passed through various operations to obtain a final product or result with by-products in many cases at different stages. The method is applicable to industries like chemical, dairy, textiles, paper, sugar etc.
this method is applicable where there is mass and repetitive production conducted through different operations. A manufacturing process may sometimes be sub-divided into number of operation. Each production process is considered as a separate cost centre.
This method is also called as ‘single costing’ or ‘output costing’. It is applicable to the concerns where there is a production of single article on a large scale by a continuous process of manufacture and all the units produced are identical and homogeneous or only a few grades lf similar articles. This method is adopted in industries like cement, steel breweries. TV , radio etc.
service oriented undertakings uses service costing for determining the unit and total cost of service provided. Service costing is applicable to the industries like, hotel , hospital, transport undertaking, power generation concerns, canteens etc.
The major difference between specific order costing and continuous operation costing is that in specific order costing , materials and labour cost are able to directly to cost unit and overheads are allocated / apportioned to a cost centre before sharing the cost over cost units. Whereas ,in case of continuous operation costing, all costs like materials, labour and overheads are allocated or apportioned to cost centres from which these costs are averaged over the cost units produced.
BBA Introduction to Cost Accounting short notes of summary
- Strategic cost management help the concern in decision making with a strategic focus taking competition and external factors into account.
- Cost represents the resources that have been incurred or sacrificed to attain a particular objective.
- Costing is a process of classification, recording allocation, appropriation of expenses incurred to facilitate the determination of cost of the product or service.
- Cost accountancy deals with application of accounting and cost accounting principles methods and techniques in ascertainment of costs and for managerial decision making.
- Cost accounting deals with establishment of standard, budgets and analysis of variance with the actual costs and analysis of profitability of the operations.
- Cost unit is a unit of product or unit of service to which costs are ascertained by means of allocation, apportionment and absorption.
- Cost object is an activity for which all costs relating to it are traced or accumulated.
- Cost accounting is a system developed for internal purpose as an aid to managerial decision making.
- Proper financial accounting system can enable to install a good cost accounting system.
- Costing system has to be developed by a concern according to its individual requirements and internal information needs.
- A good costing system will enable to set-up a management accounting system, where the cost data is analysed and used for managerial problem solving and decision making .
- The scope of management accounting is much broader in scope and is used in corporate planning and strategy formulation.
- Cost accounting system is generally kept voluntary . it may be obligatory to keep cost accounting records in certain selected industries.
- 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.
- Costing information enables to determine and enhance levels of efficiency and eliminates wastage of men, materials, machines and money and also aids in price fixation.
- The costing system set-up in the organisation must suit to the information needs and should be flexible enough to consider the changing needs of business and the system should be economical to operate.
- For successful implementation of cost system requires management’s intention and employee’s co-operation.
- As far as possible, the costing system should be integrated with financial accounting system, to remove the duplication of work.
- The installation and implementation of cost system requires trained, qualified and experienced staff.
- A cost centre is a location, person or item for which costs may be ascertained and used for the purpose of control. A cost centre is a small sub-unit in the organisation to which costs are accumulated.
- A profit centre is a sub-unit in an organisation to which both revenues and costs are assigned. The performance of a profit centre is evaluated by making comparison of actual profit with the budged profit.
- Specific order costing methods like job costing, contract costing, batch costing are used where organisations are involved in making/ assembling/ constructing jobs, contracts, products to the specific needs of individual customers.
- The continuous operation costing methods like process costing, operation costing, unit costing, service costing are used where the process involves in production of identical units of output and total costs are divided by number of units to give the average cost per unit.