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Accounting: It is a language about financial information (which is measurable in terms of money) commonly used in business.

Branches Of Accounting Financial Accounting is an art of recording (Journal), classifying (Ledger), summarizing (Trial balance), reporting (Profit & Loss A/c & Balance Sheet) and analysis (Interpretation) the financial information. Cost Accounting deals with ascertainment, measurement, accumulation, budgeting and evaluating cost structure of the entity. Management Accounting deals with decisions relating to the generation and effective utilization of the financial resources of an entity.

Cost Accounting means: Accounting for cost. The Institute of Cost and Management Accountant, England (ICMA) has defined Cost Accounting as the process of accounting for the costs from the point at which expenditure incurred, to the establishment of its ultimate relationship with cost centers and cost units Question arises what is cost? cost is expenditure incurred Next question arises expenditure incurred for what ? Expenditure incurred for a product Next question arises what is product? Production of a article Rendering of services

So Cost accounting is a specialized branch of accounting which provide processed set of information / statements to the management which assist them in decision making. Thus, main objectives of cost accounting are to;
Ascertain costs Estimate costs Undertake Cost control Undertake Cost reduction Determine selling price Facilitate preparation of financial and other statement Provide basis for operating policy

Cost means the price paid for something Cost ascertainment is computation of actual costs
Cost estimation is a process of predetermining
incurred costs of goods and service. Cost center is a location, person, or item of equipment (or group of these) for which costs may be ascertained and used for the purpose of control

Cost units are the things, that the business is set

It refers to a section of the business to which costs can be charged.

up to provide, of which cost is ascertained. Unit of product, service or time in relation to which cost may be ascertained or expressed

Basic cost elements are: Raw materials Labor Indirect expenses/overhead

Material (Material is a very important part of business)


Labor
Direct material/Indirect material Direct labor/Indirect labor

Overhead (Variable/Fixed)

Production or works overheads Administration overheads Selling overheads Distribution overheads Maintenance & Repair Supplies Utilities Other Variable Expenses Salaries Occupancy (Rent) Depreciation Other Fixed Expenses

Classification of cost means, the grouping of costs according to their common characteristics. The important ways of classification of costs are:

By Element:There are three elements of costing i.e. material, labor and expenses. By Nature or Traceability:Direct Costs and Indirect Costs. Direct Costs are Directly attributable/traceable to Cost Object. Direct costs are assigned to Cost Object. Indirect Costs are not directly attributable/traceable to Cost Object. Indirect costs are allocated or apportioned to cost objects. By Functions: production,administration, selling and distribution,R&D.

By Behavior : fixed, variable, semi-variable. Costs are classified according to their behavior in relation to change in relation to production volume within given period of time. Fixed Costs remain fixed irrespective of changes in the production volume in given period of time. Variable costs change according to volume of production.Semi-variable Costs costs are partly fixed and partly variable. By control ability: controllable, uncontrollable costs. Controllable costs are those which can be controlled or influenced by a conscious management action. Uncontrollable costs cannot be controlled or influenced by a conscious management action.

By normality: normal costs and abnormal costs. Normal costs arise during routine day-to-day business operations. Abnormal costs arise because of any abnormal activity or event not part of routine business operations. E.g. costs arising of floods, riots, accidents etc. By Time : Historical Costs and Predetermined costs. Historical costs re costs incurred in the past. Predetermined costs are computed in advance on basis of factors affecting cost elements. Example: Standard Costs. By Decision making Costs: These costs are used for managerial decision making.

The term method of costing refers to cost ascertainment. Different methods of costing for different industries depend upon the production activities and the nature of business. For these, costing methods can be grouped into two broad categories:
(1) Job costing and (2) Process costing.

In job costing, costs are collected and accumulated according to jobs, contracts, products or work orders. Each job is treated as a separate entity for the purpose of costing. The material and labour costs are complied through the respective abstracts and overheads are charged on predetermined basis to arrive at the total cost. Job costing is used in printing, furniture making, ship building, etc.

This costing method refers to continuous operation or continuous process costing. Process costing method is applicable where goods or services pass through different processes to be converted into finished goods. Process costing is used in Cement industries, Sugar industries, Textiles, Chemical industries etc.

Costing is the technique and process useful to allocation of expenditure, cost ascertainment and cost control. In order to fulfil the needs of the management it supplies necessary information to the management. The following are the various techniques of costing:
(a) Uniform Costing (b) Marginal Costing (c) Standard Costing (d) Historical Costing (e) Absorption Costing

(a) Uniform Costing: Uniform Costing is not a distinct method of costing. In fact when several undertakings start using the same costing principles and! or practices, they are said to be following uniform costing. The basic idea behind uniform costing is that the different firms in an industry should adopt a common method of costing and apply uniformly the same principles and techniques for better cost comparison and common good. (b) Marginal Costing: The C. I. M. A. London defines Marginal costing as "a technique of costing which aims at ascertaining marginal costs, determining the effects of changes in costs, volume, price etc. on the Company's profitability, stability etc. and furnishing the relevant data to the management for enabling it to take various management decisions by segregating total costs into variable and fixed costs.

(c) Standard Costing: Standard Costing is a technique of cost accounting which compares the standard cost of each product or service with actual cost to determine the efficiency of the operation, so that any remedial action may be taken immediately.

(d) Historical Costing: Historical costing is the ascertainment and recording of actual costs when, or after, they have been incurred and was one of the first stages in the growth of the Cost Accountant's work. Actual costs refer to material cost, labour cost and overhead cost. (e) Absorption Costing: Absorption Costing is also termed as Full Costing (or) Orthodox Costing. It is the technique that takes into account charging of all costs both variable and fixed costs to operation processed or products or services.

a)Assists in Improving Profitability: It enables management to maintain effective control over inventory to maximize efficiency and minimize wastages and losses by providing detailed costing information. Profitable and unprofitable activities are disclosed. Management can take steps to eliminate unprofitable products and develop profitable products for improving profitability of the firm. (b) Information for Estimates and Tenders: It helps cost estimation and fixation of prices. In case of big contracts or jobs, it is difficult to give quotation, without knowing estimated cost. (C) Helps in Preparation of Interim Final Accounts: Value of closing stock is available, at any time. It provides a perpetual inventory system, which helps in the preparation of interim profit and loss account and balance sheet, without any stock taking. (D) Reconciliation of Accounts and Reliability: It provides an independent and reliable check on the accuracy of financial accounts, through reconciliation of cost records and financial records.

(E) Fixation of Responsibility in Controlling Costs: When variances are to be corrected, responsibility has to be fixed for corrective action. It helps in controlling costs, with the application of standard costing and budgetary control. (F) Aid in Decision-making: Costing helps the management in taking vital decisions such as:
(i) Whether it would be profitable to purchase a component or commence its production, instead of purchasing, done presently. (ii) Whether to accept the order, below its total cost. (iii) Comparing the costs involved in different methods of production and choosing the cost effective method.

(G) Guides Future Production Policy: Cost data helps the management in formulating future production policy. They can rely on costing records to form their judgment about the profitability and future of the firm. (H) Aid to Employees: When the organization benefits, it would be able to share the benefit of higher operating results in the form of performance bonus, incentives etc with employees of the firm. (I) Aid to the Nation: Costing system brings the benefits of cost reduction, cost control and elimination of wastages and inefficiencies, which would lead to the growth of the nation, as a whole. k. Help in Cost control l .Help in Decision making m.Guides in Price fixation n.Help in cost reduction o. Finds outs profitable and unprofitable operations P. Finds out idle capacity

1. Not exact Science: Like any other accounting system, Cost Accounting is not an exact science but an art, which has developed through theories and practices. 2. Solution not Available: The cost accounting provides information for taking decisions, but does not give the exact solution to the problem. 3.Historical Data: Cost data are essentially post facto and historical in nature. 4. Expensive: Installation of cost accounting system is costly, which small firms cannot afford to have. Before installing, care must be exercised to ensure that the benefit derived is more than the cost on investment. 5. System is more Complex: As the cost accounting system involves number of steps in ascertaining costs such as collection, classification of expenses, allocation and apportionment of expenses, users consider it as a complicated system. More so, the system requires use of several documents and forms in preparing reports. Staff requires expertise in using the system. 6. Lack of Accuracy: The accuracy of cost accounting gets distorted due to use of estimated costs.

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