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Cost Accounting 4th semester, and cost accounting
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9/13/24, 9:53 Cost Accounting 4th semester, and costAM accounting
Cost Accounting Types, Methods and Techniques of Costing (i) Direct materials: The materials which can be Classification of Overheads 1. UNIT COSTING
It is a branch of accounting and has been developed due to 1. Job costing: It refers to a system of costing in which easily identified and attributable to the individual Overheads can be classified on the following basis: It is an important method of costing. It is also known as
limitations of financial accounting. units being manufactured are known as direct materials. Function-wise classification: Overheads can be divided into output costing or single costing. It is used to
costs are ascertained in terms of specific jobs or orders i)
Limitations of Financial Accounting which are not comparable with each other . Job Costing These materials also form part of finished products. All the following categories on functional basis. ascertain thecost of producing a unitof output..
(1). No clear idea of operating efficiency: Sometimes includes the following methods of costing: (a) Contract costs which are incurred to obtain direct materials are (a) Manufacturing or production overheads eg:- indirect Features:
profits in an organization may be less or more because of Costing: Although contract costing does not differ in known as direct material costs. materials like lubricants, cotton wastes, indirect labour like 1. It is usedwhere output can be measured in convenient
inflation or trade depression and not due to efficiency or principle from job costing, it is convenient to treat (ii) Indirect materials: Indirect materials, on the salaries and wages of supervisors, inspectors, storekeepers, physical unit (2). It is followed in concern s engaged in the
inefficiency (2). Weakness not spotted out by collective contract cost accounts separately (b) Bach Costing: This other hand, are those materials which are of small indirect expenses like rent, rates and insurance of factory, production of a single product (3). It is followed in
results: Financial Accounting shows the net result method is also a type of job costing. A batch of similar value such as nuts, pins, screws, etc. and do not physically power, lighting of factory, welfare expenses like canteen, industries where manufacturing process is continuous
of an organization. (3). Does not help in fixing the price: In products is regarded as one job and the cost of this form part of the finished product. Costs associated with medical etc. (b) Administration overheads eg:- indirect 4. It is followed where all units of production are identical
Financial Accounting, we get the total cost of production complete batch is ascertained (c) Terminal Costing: This indirect materials are known as indirect material costs. --------------------------------------------------------------------------
materials like office stationery and printing,
but it does not aid in determining prices of the products, method is also a type of job costing. This method indirect labour salaries of office clerks, secretaries, JOB COSTING
services, production order and lines of products. emphasizes the essential nature of job costing, ie, the cost Time Booking
(4). No classification of expenses and accounts: In Time booking is the recording of time spent by the worker accountants, indirect expenses rent, rates and insurance of In the case of a job, work is usually carried outwithin the
can be properly terminated at some point and related to factory or workshop. Sometimes, a job is accomplished
Financial Accounting, we don’t get data relating to costs a particular job. (d) Operation Costing: This method is on different jobs or work orders carried out by him during office, lighting heating and cleaning of office, etc.
incurred by departments, processes separately or per unit (c) Selling and Distribution overheads eg:- i ndirect materials even in the customer’s premises. This method of costing is
adopted when it is desired to ascertain the cost of carrying his period of attendance in the factory. The objects of applicable to ship building, printing, engineering, machine
cost of product lines, or cost incurred in various sales like catalogues, printing, stationery, price list, indirect sal ary
out an operation in a department, for example, welding. time booking are: (1). To ensure that time spent by a tools, readymade garments, shoes, hats, furniture, musical
territories. (5). No data for comparison and decision of sal esmen, agents, travellers, sales managers, indirect
making: It does not supply useful data to management for 2. Process Costing: Where a product passes through worker in a factory is properly utilized on different jobs or instruments, interior decorations etc.
expenses like rent, rates and insurance of showroom, finished
comparison with previous period and for taking various distinct stages or processes, the output of one process work orders. (2). To ascertain the labour cost of each Features: (1). Each job has its own characteristics,
being the input of the subsequent process, it is frequently individual job or work order. (3). To provide a basis for goods, godown etc., advertising expenses, after sales service, depending up on the special order placedby the customer.
financial decisions as introduction of new products, the apportionment of overhead expenses over various discounts, bad debts etc.
desired to ascertain the cost of each stage or process of (2). Each job is treated as a cost unit. (3). A separate job
replacement of labour by machines, price in normal or jobs or work orders when the method for the allocation of ii) Behavior-wise classification: Overheads can be classified
special circumstances, producing a part in the factory or production. This is known as process costing cost sheet is made out for each job on the basis of
3. Unit or single or output or single output overheads depends upon time spent on different jobs. into the following categories as per behavior pattern. distinguishing numbers. (4). A separatework in progress
buying it from outside market, production of a product to (4). To ascertain unproductive time or idle time so as to (a) Fixed overheads like managerial remuneration, rent of ledger is maintained for each job. (5). The duration of the
be continued or given up, priority accorded to different costing: This method is used where a single article make efforts to keep it in limit. (5). To know the time
products, investment to be made in new products or not is produced or service is rendered by continuous building, insurance of building, pl ant etc. (b) Variable job is normally a short period. (6). Profit or loss is
taken to complete a particular job so that bonus can be overheads like direct material and direct labour. (c) Semi- determined for each job independently of others
etc. (6). No control on cost: Financial Accounting does not manufacturing activity. The cost of the whole production
cycle is ascertained as a process or series of processes and paid as per the incentive schemes. (6). To know the variable overheads like depreciation, telephone charges, repair Advantages of Job costing: (1). It helps to
help to control materials, supplies, wages, labour and efficiency of workers, it is necessary to make the
overhead costs. (7). Does not provide standards to assess the cost per unit is arrived at by dividing the total cost by and maintenance of buildings, machines and equipment etc. distinguish profitable jobs from unprofitable jobs
comparison of actual time taken with time allowed for iii) Element-wise classification: Overheads can be classified (2). It helps to identify defective work and spoilage with a
the performance: Financial Accounting does not help the number of units produced.
completing a particular task. into the following categories as per element. (a) Indirect department or person (3). Selling price of special orders
in developing standards to assess the performance of 4. Operating Costing: This method is applicable
various persons ordepartments. (8). Provides only where services are rendered rather than goods produced. Budgeting and Budgetary control: Budgeting materials (b) Indirect labour (c) Indirect expenses can easily be fixed. (4). It helps to prepare estimates of
historical information: Financial Accounting records only The procedure is same as in the case of single output simply means preparing budgets. It is a process of cost for submitting quotations and tender for similar jobs
the historical costs incurred. (9). No analysis of losses: It preparation, implementation and the operation of budget.
CONTRACT COSTING 5. It helps to controlfuture cost.
costing. It is a special form of job costing and it is the most
does not provide complete analysis of losses due to Being a plan of action, a budget guides every manager in ----------------------------------------------------------------------------
5. Multiple or Complete Costing: Some products appropriate method to be adopted in such industries as
defective material, idle time, idle plant and equipment etc.
are so complex that no single system of costing is the decision making process. Procedure for Job order costing system:
(10). Inadequate information for reports: It does not building and construction work, civil engineering,
applicable. It is used where there are a variety of Objectives of Budget and Budgetary control: (1). Receiving an enquiry from the customer regarding
provide adequate info for reports to outside agencies such mechanical fabrication and shipbuilding. price, quality etc (2). Make an estimation of the price of
components separately produced and subsequently 1. To aid the planning of annual operations (2). To co
as banks, govt, insu companies and trade associations. features: (1). Eachcontract itself a cost unit. (2). Work the job after considering the cost incurred for the execution
assembled in a complex production. ordinate the activities of the various parts of the
-------------------------------------------------------------------------- organization (3). To communicate plans to the various is executed at customers site (3). The existence of sub of similar job in the previous year (3). Receiving
6. Uniform Costing: It is not a distinct method of
responsibility centre managers (4). To motivate managers contract (4). Most of the expenses incurredupon the an order, if the customer is satisfied with the quotation
General Principles of Cost Accounting costing by itself. It is the name given to a common system price and other terms of execution. (4). If the job is
to strive to achieve the organizational goals. (5). To contracts are direct. (5). Cost control is very difficultin
of costing followed by a number of firms in the same accepted, a production order is made by the Planning
1. A cost should be related to its causes: Cost should be industry control activities (6). To eliminates the wastes of all kinds contract costing.
related as closely as possible to their causes so that cost (7). To provide a yard stick against which actual results department. (5). The costs are collected and recorded for
7. Departmental Costing: When costs are PROCESS COSTING : Process costing is the method of each job under separate production order Number,
will be shared only among the cost units that pass can be compared (8). To evaluate the performance of
thorough the department of which the expenses are ascertained department by department, the method is managers. (9). To reduce the uncertainties costing applied in the industries engagedin continuous or and a Job Cost Sheet is maintained for that purpose. (6).
called “Departmental Costing”. Usually, for ascertaining On completion of job, a completion report is sent to
related. (2). A cost should be charged only after it has the cost of various goods or services produced by the mass production. Process costing is a methodof costing
been incurred: While determining the cost of individual Essentials of a Budgetary Control system used to ascertain the cost of a product at each process or costing department.
units those costs which have actually been incurred department, the total costs will have to be analysed, say, 1. Support by top management: The wholehearted support ------------------------------------------------------------------------------
stage of manufacturing.
by the use of job costing or unit costing. of all managerial persons is very necessary for the success
should be considered. (3). The convention of prudence Characteristics of Process Costing Difference between Process Costing and Job
should be ignored : In Cost Accounting this convention of a budgetary control system. (2). Formal organization:
The existence of a formal and sound organizational (1.) Production is continuous (2). Products pass through Costing
must be ignored, otherwise, the management appraisal of two or more distinct processes of completion(3). Products
the profitability of the projects may be vitiated. Perpetual Inventory System structure is of an absolute necessity for an effective Process Costing (1). Production is continuous
are standardized and homogeneous. (4). Products are not (2). Production is for stock (3). All units produced are
(4). Abnormal costs should be excluded from cost The Chartered Institute of Management Accountants, system of budgetary control. (3). Budget centers: For distinguishable in processing stage. (5). The finished
accounts: Costs which are of abnormal nature should be London, defines the perpetual inventory as “a system of budgetary control purposes, the entire organization will identical or homogeneous (4). There is regular transfer of
product of one process becomes the raw material of the
ignored while computing the cost, otherwise, it will distort records maintained by the controlling department, which be split into a number of departments, area or functions, cost of one process to subsequent processes
subsequent process. (6). Cost of material, labour and 5. Work in progress always exists
costs figures and mislead management as to working reflects the physical movements of stocks and their current known as ‘centres’, and budgets will be prepared
balance”. Thus this is a system in which, with the help of for each such centers (4). Clear cut objectives and overheads are collected for eachprocess and charged Job Costing (1). Production is according to
results of their undertaking under normal conditions. reasonably attainable goals:- If goals are too high to be accordingly.
(5). Past costs not to be charged to future period: Costs Bin Cards and Stores Ledger, the balance of stock is customers’ orders (2). Production is not for stock
ascertained after every receipt and issue of materials attained, the purpose of budgeting is defeated. On the Advantages of Process Costing (3). Each job is different from theother (4). There isno
which could not be recovered or charged in full during the (1). It is easy to compute average cot because the products
The following are the advantages of the perpetual other hand, if the goals are so low that they can be regular transfer of cost fromone job to another
concerned period should not be taken to a future period, attained very easily, there will be no incentive to special are homogeneous in Process Costing. (2). It is possible to (5). Work in progress may or may not exist
for recovery (6). Principles of double entry should be inventory system: (1). It avoids the disruption of effort. (5). Participative budgeting: Every executive ascertain theprocess costs at short intervals. (3). Process
applied wherever necessary: Costing requires a greater production for physical checking of all items of stores at responsible for the implementation of budgets Costing is simple and less expensive in relation o job Work-in-Progress
use of cost sheets and cost statements for the purpose of the end of the year. (2). The preparation of Profit and Loss should be given an opportunity to take part in the costing (4). By evaluating the performance of each process In most of the firms manufacturing is on a continuous
cost ascertainment and cost control, but cost ledger and effective managerial control is possible. basis and the problemof work-inprogress is quite
Account and Balance Sheet is possible without physical preparation of budgets. (6). Budget committee: The work
cost control accounts should be kept on double entry verification of stock. (3). A detailed and more reliable common. The work-in-progress consists of direct
principle as far as possible.
of preparing a budget manual should be entrusted to a Disadvantages of Process Costing :(1). Valuation materials, direct wages and production overhead.
control on the materials in store is obtained. (4). As the Budget committee. The work of scrutinizing the budgets of work in progress is difficult. (2). It is not easy to value
work of recording and continuous stocktaking is carried as well as approving of the same should be the work of losses, wastes, scraps etc. (3). The apportionment of total
Objectives of Cost Accounting out systematically and without undue haste, the figures this committee. (7). Comprehensive budgeting: Budgeting cost among joint products and by-productsis difficult. (4).
(1). To analyse and classify all expenditure with reference are more reliable. (5). Continuous stocktaking will make should not be partial, it should cover all the functions . Process cost are not accurate, they are only average costs
to the cost of products and operations. (2). To arrive at the the storekeeper and the stores accountant more vigilant (8). Adequate accounting system: There should be an (5). Process costs areonly historical.
cost of production of every unit, job, operation, process, in their work and they will try to keep the records adequate accounting system for the successful budgetary
accurate and up-to-date. (6). Planning of production can
Principles of Process Costing
department or service and to develop cost standard. control system, because those who are involved in the (1). Production activity should be divided into different
(3). To indicate to the management any inefficiencies and be done without any fear of shortage as the management preparation of estimates depend heavily on the
is constantly informed of the stores position.(7). An processes or departments. (2). A separate account is
the extent of various forms of waste, whether of materials, accounting department. (9). Periodic reporting: - There
inbuilt system of internal check will be in operation as bin opened for each process. (3). Both direct and indirect
time, expenses or in the use of machinery, equipment and should be a prompt and timely communication and costs are collected for each process. (4). The quantity of
tools. (4). To provide data for periodical profit and loss cards and the stores ledger keep a check on each other. reporting system for the effective implementation of a
output and costs are recorded in the respective process
accounts and balance sheets at such intervals, e.g. weekly, (8). Errors and shortage of stock are readily discovered budgetary control system.
and efforts are made to avoid the shortage of stock in accounts. (5). The cost per unit is determined by dividing
monthly or quarterly as may be desired by the anagement the total cost at the endof each process by the number of
during the financial year, not only for the whole business future. (9). The capital invested in the stores can be kept
under control and efficiently used as stock can output of each process. (6). Normal loss and abnormal loss
but also by departments or individual products (5). To
be compared with the minimum and maximum levels. Types of standards are credited in the process account
reveal sources of economies in production having regard
(10). It makes available correct stock figures for claim to (1). Basic standards: A standard established for use over a
to methods, types of equipment, design, output and layout.
Daily, Weekly, Monthly or Quarterly information be lodged with the insurance company for loss on account long period is known as the basic standard. It remains
of stock destroyed by fire unaltered over a long period. Its use is to show long term
may be necessary to ensure prompt constructive action.
trends, and it operates in a similar way to index numbers.
(6). To provide actual figures of costs for comparison with It is also known as the ‘bogey, standard. This standard is
estimates and to serve as a guide for future estimates or used for items or costs which are likely to remain constant
quotations and to assist the management in their price Distinction between standard costing and over a long period. (2). Current standard: A standard
fixing policy. (7). To show, where Standard Costs are established for use over a short period of time and related
prepared, what the cost of production ought to be and budgetary control:
to current conditions, is known as the ‘current standard’.
with which the actual costs which are eventually recorded (1). Budget is based on past performance, while standard This standard shows what the performance should be
may be compared. (8). To present comparative cost data is established on the basis of technical estimates. under current conditions. Conditions during which period
(2). Budgets consider both income and expenditure the standard is used are known as current conditions.
for different periods and various volume of output and to
provide guidance in the development of business. whereas standards are for expenditure only. (3). Budgets (3). Ideal standards & Expected standards:- Ideal standard
projects financial accounts, while standard cost project
9. To record the relative production results of each unit of is that which can be attained under the most favourable
cost accounts (4). In standard costing, variances are conditions, while expected standard is that which is
plant and machinery in use as a basis for examining its
efficiency (10). To provide a perpetual inventory of stores analyzed in detail, but such a detailed analysis of variance expected to be attained during a specified budget period.
and other materials so that interim Profit and Loss is not possible in budgetary control. (5). Budget fix It is a target which is attainable and can be achieved if the
minimum limit while standard fix targets. (6). Budgets are expected conditions operate during the period for which
Account and Balance Sheet can be prepared without stock
used for the forecasting men, money and materials, the standard is set. (4). Normal standard: This standard is
taking and checks on stores and adjustments are made at
frequent intervals. standards cannot be used for forecasting. (7). Budgetary defined as “the average standard which it is anticipated
control technique is applicable to all types of businesses. can be attained over a future period of time, preferably
However standard costing is useful only for long enough to cover one trade cycle.”It is difficult to
manufacturing organizations. (8). The standards are follow normal standards in practice as it is not possible to
Cost Accounting and Financial Accounting expressed in per unit of production whereas budgets are forecast performance with a reasonable degree of
accuracy for a long period of time.
(1). Financial accounting emphasizes the measurement of for specific periods and are expressed in total.
profitability, while cost accounting aims at ascertainment (9). Budgetary control does not require standardization of
product. But standard costing requires standardization of
of costs and accumulates data for this very purpose.
(2). Financial accounting provides operating results and product.
financial position usually gives information through cost
reports to the mgmnt as and when desired. (3). Financial
accounts deal mainly with actual facts and figures, but cost
------------------------------
accounts deal partly with facts and figures, but cost
accounts deal with facts and figures and partly with
estimates. (4). The costs are reported in aggregate in
financial accounts but costs are broken into unit basis in
cost accounts. (5). Financial accounts do not provide info
on the relative efficiencies of various workers, plants and
machinery while cost accounts provide valuable info on
the relative efficiencies of various plants and machinery.
(6). In financial accounts stocks are valued at cost or
market price whichever is less, whereas stocks are valued
at cost price in cost accounts.
Importance of Cost Accounting
(a) Costing as an aid to management:- Cost accounting
provides invaluable aid to management. It provides
detailed costing information to the management to enable
them to maintain effective control over stores and
inventory, to increase efficiency of the organization and to
check wastage and losses. It facilitates delegation of
responsibility for important tasks and rating of
employees
b) Costing as an aid to Creditors : Investors, banks and
other money lending institutions have a stake in the
success of the business concern are therefore benefitted
immensely by the installation of an efficient system of
costing.
c) Costing as an aid to employees. : Employees have a vital
interest in their employer’s enterprise in which they are
employed. They are benefited by a number of ways by the
installation of an efficient system of costing.
d) Costing as an aid to National Economy : An efficient
system of costing brings prosperity to the business
enterprise which in turn brings prosperity to the business
enterprise which in turn results in stepping up of the
government revenue
about:bl 1
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