BASIC CONCEPT OF COST ACCOUNTANCY

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1. DEFINITION: Cost Accountancy

Applications of Costing and Cost Accounting principles, methods and technique to the art, science and practice of cost control and ascertainment of profitability. It includes presentation of information derived there-from for the purpose of managerial decision-making’.

1.1 PRINCIPLES

• Maintaining Professional Competency, Integrity, Confidentiality and Objectivity
• Continuous development of knowledge & skill.
• Refrain from disclosing or misusing confidential information.
• Refrain from engaging in or supporting any activity that would discredit the profession.
• Communicate information fairly and objectively.

1.2 OBJECTIVE

• Application of right Methods or ways of correct cost findings at variant situations,
• Application of suitable Techniques of cost control and assessing operational profitability.
• Development of Art of presentation for quick and easy interpretation of performance.
• Enhancing Professional expertise to the best use of Management.


1.3 METHODS

Costing has been stated as method of classifying, recording and charging of cost to the products and services through appropriate and logical process or system depending on the nature of industry, Costing methods have been broadly divided into the following categories, viz.

1.3.1 JOB COSTING for jobbing industries engaged in production on specific order of customer and

1.3.2 PROCESS COSTING for process industries engaged in production of repetitive nature of products in a continuous process.

1.3.3 Variants of those broad methods of costing.

i) Contract or Terminal Costing: This is a variant of JOB Costing. This method is followed in huge single contract like, Building, Bridge, and Road etc. Separate accounts are being opened for different contracts.
ii) Batch Costing: This is an extension of Job costing. When a number of units of homogeneous type are produced in a batch, the said batch is being treated as a job. Cost arrived at for the batch as a whole in the card is divided by the number of units in that in order to arrive at the average cost per unit in that batch. Such method is followed in Cycle Industry.
iii) Single or output Costing: This is a method of costing being followed where the output is single like Coal Industry.
iv) Multiple/ Composite Costing: Different kinds components, sub-assemblies are produced in batches or through a continuous process for ultimate use in the main Job order. Different method of costing is applied for each segment and job costing for the main job undertaken as per specific order of the customer. Boiler industry is an example of application of such method
v) Operation Costing: This is an extension of Process Costing. In certain Process industries, when a process is divided into certain operations and Management need to have thorough costing of each and every operation for the purpose of control and decision-making. Food products and Chemical industry can be ideal examples for application of such costing.
vi) OPERATING COSTING for operating industries rendering services; viz., Transport Industries

2. COSTING TECHNIQUES
Besides such methods of assessment of cost of a job or a process, certain costing techniques followed for the purpose of cost control and management decision.

2.1. a) Standard Costing: This is a technique to assess standard cost of the product, recording the actual, comparing the actual with that of the standard, finding out the variation with reasons for ultimate control or revision of standard, if necessary. This technique can be well use of in cases standard and repetitive nature of work having all kinds of standard facilities.


2.2. b) Marginal Costing: This is a technique to assess marginal cost (Prime Cost and variable overhead) of products and contribution there-of by deducting marginal cost from sales. Fixed cost is kept away from cost structure. Profitability of each product is assessed through a ratio of contribution to sale (P/V ratio). The main idea behind this technique is assessment of true profitability of each product. Arbitrary distribution of fixed overheads, in absence of suitable bases makes it difficult to calculate correct profitability of the various products. Cost Accountants can assist management in various decision making areas like ‘Optimum product mix, pricing, make or buy and a host of other decisions in day to day business in a competitive world.

2.3. c) Uniform Costing: This is a technique of cost control by applying method of costing uniformly in various production units of homogeneous type so that it makes possible to compare the product-wise cost incidence of each unit. This is a technique to control cost through ‘Inter firm comparison’.

2.4. d) Differential Cost Analysis: This is a technique applied to find out optimum capacity utilization by comparing incremental revenue with that of differential cost at different level of capacity. This is a contribution of Cost Accountant in managerial decision- making where there is a limitation of Marginal Costing.

3. COST ACCOUNTING

As defined, Cost Accounting is a process of accounting for the cost from the point at which it is incurred or committed to the establishment. Cost accounting necessarily starts from the same original sources like vouchers and primary document. Cost accounts relates to the operational side of the business. It classifies accounting information and records, arranges and interprets such expenses by the cost elements like materials, labour and expenses.

As in the case of general accounting system, transactions relating to factory operations, to be finally reflected in cost accounts, are recorded in the books of original entry. Summaries of these books are initially journalized and posted in the general ledger, which contains control accounts and subsidiary books.

In Ordnance factories PRINCIPAL LEDGER with 30 heads serves the purpose of Cost Accounting.




4. Activity Based Costing

A latest technology incorporated by many organizations with their scientific and updated cost accounting system. ABC has its’ genesis in the growing incidence of indirect expenditure in the manufacturing operations with the increasing trend of management cost consciousness to ensure its’ survival in the global competition.

This is, specifically, a process of distribution of indirect cost amongst the various products and services more accurately and scientifically.


4.1. What it aims
• Overcome the problem of inaccurate cost findings and cost reporting due to wrong selection of bases of cost distribution.
• Identification of no value added activities and improvement in performance and activities.
• Cost cutting and down-sizing (Indirect cost).
• Activity based Budgeting.
• Target Costing