Cost and Management Accounting 2009 (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”.

Objectives of Cost accounting
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.

Disadvantages of Cost Accounting: Cost accounting has become indispensable tool to management for exercising effective decisions. However, the following are the usual objections raised against cost accounting:
a)      Cost Accounting is costly to operate: One of the objections against cost accounting is that it involves heavy expenditure to operate. No doubt, expenses are involved in introduction and operation of cost accounting system. This is the case with any accounting system; the benefits derived by operating the system are more than the cost. Therefore an organization need not hesitate to install and operate the system.

b)      Cost Accounting is unnecessary: It is felt by a few that cost accounting is of recent origin and an enterprise can survive without cost accounting. No doubt financial accounting may be helpful to draw P & L Account and Balance Sheet but an enterprise can work efficiently with the help of cost accounting and it is necessary to increase efficiency and profitability in the long run.

c)       Cost Accounting involves many forms and statements: It is pointed against cost accounting that it involves usage of many forms and statements which leads to monotony in filling up of forms and increase of paper work. It is true that cost accounting is operated by introducing many forms and preparation of statements. This will become routine and as time passes the utility of forms is realized and the forms can be reviewed, revised, simplified and minimized.

d)      Costing may not be applicable in all types of Industries: Existing methods of cost accounting may not be applicable in all types of industries. Cost accounting methods can be devised for all types of industries, and services.

e)      It is based on Estimations: Some people claim that costing system relies on predetermined data and therefore it is not reliable. Costing system estimates costs scientifically based on past and present situations and with suitable modifications for the future. This leads to accurate cost figures based on which management can initiate decisions. But for the predetermined costs, cost accounting also becomes another ‘Historical Accounting’.