Nature & Scope of Cost A/Cing

Financial accountingCost accounting

Management accounting

Financial accountingFinancial accounting is mainly concerned

with recording, classifying and summarising financial transactions in accordance with generally accepted principles of accounting. Financial accounting records cash and credit transactions of a business according to the nature of expenditure and income so that;

Trading and profit and loss account & Balance Sheet may be prepared.

Statement of sources and applications of cash flow may be prepared.

Management accountingIt is that branch of accounting which

provides information for planning and control to the management.

It assists the management in the creation of policy and in day to day operations of the business.

Cost accountingIt explains the cost of production of a product

or a service according to its components per unit as well as total. It involves classification, accumulation, analysis, assignment and control of cost. It’s need arose because of the limitation of financial accounting.

‘the technique and process of ascertaining cost.’

Limitations of cost accounting Financial accounts show only the net results

of the business.Financial accounts do not make any

difference b/w direct and indirect cost.Financial accounts fail to reveal the weak

points of the business.Financial accounts fail to help in fixation of

selling price.Financial accounts fail to provide control on

material, labour and other expenses. Contd.

Limitations contd.Financial accounts lack to reveal operating

efficiency or inefficiency.Financial accounts fail to provide comparison of

cost of products.Financial accounts lack in performance appraisal

of the organisation.Financial accounts fail to analyse the losses.Financial accounts fail to keep proper records

regarding use of machinery.Financial accounts fail to reveal profits product

wise.

Scope of cost accountingCost calculations

Cost accounting

Cost control

Financial accounting Vs. cost a/csSimilarities;Same vouchers.Double entry system is used in both.Profit and loss is disclosed in both.Cost a/cs is subsidiary and supplementary to

financial a/cs.Reconcilliation is required to prove the

accuracy of both systems.Both systems help in managerial policies.

Differences in both systemsPoints of difference:PurposeRecording method ControlPeriodicity of reportingInformationFixation of selling priceReporting of costAnalysis of profit

contd.

Contd.FiguresStock valuationOperational rather than mandatoryDisclosure of relative efficiencyUse of charts, graphs and diagrams

Principles of cost a/csA cost should be related to its cause.A cost should be charged only after its

incurrence.Abnormal cost should be excluded from

costing.Past costs are not charged to future periods.Principle of double entry system should be

applied.

Objectives of cost accountingTo ascertain cost

Cost control

Determination of selling price

Contd.Ascertainment of profitability

Inter –firm comparison

Control on wastage

Contd.Minimum capital in stocks

Effective information system

Internal audit system

Deciding business policiesTo introduce a new product

Use of idle capacity

Deciding sales mix

Contd.

Make or buy decision

Exporting even at a low cost

Closing down or suspending activities

Advantages of cost a/cs•Advantages to mgt.

•Advantages to employees

•Advantages to society& nation

Advantages to mgt.Identification of profitable & unprofitable

activities.Calculation of tender price.Formulation of business policies.Helps in decision making.Helps in making comparison.Helps in controlling cost of production.Helps in checking material cost.

Advantages to employeesBetter wages.Distinction b/w efficient & inefficient worker.Higher std. of living.Social recognition of workers.Low labour turnover.Elimination of strikes, lockouts and dispute.More bargaining power of the empolees.

Advantages to society & nationBetter quality products at low prices.Uplift of society as a whole.Economically powerful & progressive nation.Capable to meet international competition.Formulation of better national policies.

Methods of costingJob costing Batch costingContract costingProcess costingUnit costingOperating costing

Features of ideal costing systemSimplicitySuitability to the businessEconomicalFlexibilityComparabilityMinimum official workMinimum change in existing set upUniformity of formsEfficient control on material & labour

Contd.Allocation & apportionment of overheadsReconciliation of cost &financial a/csAccountability should be establishedDuties and responsibility of cost accountant

should be clearly defined.

Installation of costing systemMinimum disturbance to existing set up.

Introduction of costing system in steps.

To control wastage and improve overall efficiency

Steps for installing costing systemObjective and expectation from costing

system should be defined.Studying the structure of organisation.Nature of business to be studied.Reporting system.Co-operation and support of staff.Determining the cost rates.Organising the cost office.Co-ordinating with other deptt. s

Difficulties in installing costing systemLack of support from top level mgt.Opposition by existing accounting staff.Non- cooperation by other staff.Shortage of trained staff.Heavy cost of installation and operation of

costing system.

Objections against cost a/csHighly expensive.UnnecessaryResults are not trust worthy.Excessive use of stationery.Inapplicable in so many cases.