Cost accounting 2010 (Solved)

Cost:  The term ‘cost’ has to be studied in relation to its purpose and conditions. As per the definition by Institute of Cost and Management Accountants (I.C.M.A.), now known as Chartered Institute of Management Accountants (C.I.M.A.), London ‘cost’ is the amount of: actual expenditure incurred on a given thing.
Costing: The I.C.M.A., London has defined costing as the ascertainment of costs. “It refers to the techniques and processes of ascertaining costs and studies the principles and rules concerning the determination of cost of products and services”.
Cost Accounting: It is the method of accounting for cost. The process of recording and accounting for all the elements of cost is called cost accounting. I.C.M.A. has defined cost accounting as follows: “The process of accounting for cost from the point at which expenditure is incurred or committed to the establishment of its ultimate relationship with cost centers and cost units. In its widest usage it embraces the preparation of statistical data, the application of cost control methods and the ascertainment of the profitability of activities carried out or planned”.

a)      Ascertainment of Cost: It enables the management to ascertain the cost of product, job, contract, service or unit of production so as to develop cost standard. Costs may be ascertained, under different circumstances, using one or more types of costing principles-standard costing, marginal costing, uniform costing etc.
b)      Fixation of Selling Price: Cost data are useful in the determination of selling price or quotations. Apart from cost ascertainment, the cost accountant analyses the total cost into fixed and variable costs. This will help the management to fix the selling price; sometimes, below the total cost but above the variable cost. This will increase the volume of sales more sales than previously, thus leading to maximum profit.
c)       Cost Control: The object is to minimize the cost of manufacturing. Comparison of actual cost with standards reveals the discrepancies- variances. It the variances are adverse, the management enters into investigation so as to adopt corrective action immediately.
d)      Matching Cost with Revenue: The determination of profitability of each product, process, department etc.  is the important object of costing.
e)      Special Cost Studies and Investigations: It undertakes special cost studies and investigations and these are the basis for the management in decision-making or policies. This will also include pricing of new products, contraction or expansion programmes, closing down or discontinuing a department, product mix, price reduction in depression etc.
f)       Preparation of Financial Statements, Profit and Loss Account, Balance Sheet: To prepare these statements, the value of stock, work-in-progress, finished goods etc., are essential; in the absence of the costing department, when we have to close the accounts it rather takes too much time. But a good system of costing facilitates the preparation of the statements, as the figures are easily available; they can be prepared monthly or even weekly.

a)      Helps in Decision Making: Cost accounting helps in decision making. It provides vital information necessary for decision making. For instance, cost accounting helps in deciding:
a.       Whether to make a product buy a product?
b.      Whether to accept or reject an export order?
c.       How to utilize the scarce materials profitably?
b)      Helps in fixing prices: Cost accounting helps in fixing prices. It provides detailed cost data of each product (both on the aggregate and unit basis) which enables fixation of selling price. Cost accounting provides basis information for the preparation of tenders, estimates and quotations.
c)       Formulation of future plans: Cost accounting is not a post-mortem examination. It is a system of foresight. On the basis of past experience, it helps in the formulation of definite future plans in quantitative terms. Budgets are prepared and they give direction to the enterprise.
d)      Avoidance of wastage: Cost accounting reveals the sources of losses or inefficiencies such as spoilage, leakage, pilferage, inadequate utilization of plant etc. By appropriate control measures, these wastages can be avoided or minimized.
e)      Highlights causes: The exact cause of an increase or decrease in profit or loss can be found with the aid of cost accounting. For instance, it is possible for the management to know whether the profits have decreased due to an increase in labour cost or material cost or both.
f)       Reward to efficiency: Cost accounting introduces bonus plans and incentive wage systems to suit the needs of the organization. These plans and systems reward efficient workers and improve productivity as well improve the morale of the work -force.
g)      Prevention of frauds: Cost accounting envisages sound systems of inventory control, budgetary control and standard costing. Scope for manipulation and fraud is minimized.
h)      Improvement in profitability: Cost accounting reveals unprofitable products and activities. Management can drop those products and eliminate unprofitable activities. The resources released from unprofitable products can be used to improve the profitability of the business.
i)        Preparation of final accounts: Cost accounting provides for perpetual inventory system. It helps in the preparation of interim profit and loss account and balance sheet without physical stock verification.
j)        Facilitates control: Cost accounting includes effective tools such as inventory control, budgetary control and variance analysis. By adopting them, the management can notice the deviation from the plans. Remedial action can be taken quickly.