Cost and Management Accounting 2010 (Solved)


THE NATURE OF COST ACCOUNTING
Cost accounting, sometimes called management or managerial accounting, should be considered the key managerial partner, furnishing management with the necessary accounting tools to plan and control activities.
In the planning phase, cost accounting deals with the future. It helps man­agement to budget the future or predetermined materials costs, wages and salaries, and other costs of manufacturing and marketing products. These costs might be used to assist in setting prices and disclosing the profit that will result, considering competition and other economic conditions. Cost informa­tion is also provided to aid management with problems such as capital expen­diture decisions, expansion of facilities for increased sales or production, make-or-buy decisions, or purchase-or-lease decisions.
In the control phase, cost accounting deals with the present, comparing current results with predetermined standards and budgets. Cost control, to be effective, depends upon proper cost planning for each activity, function, and condition. Via the cost accounting media, management is informed frequently of those operating functions that fail to contribute their share to the total profit or that perform inefficiently, thereby leading to profit erosion.
Periodically, generally at the end of the fiscal period, cost accounting deals with past costs for the purpose of profit determination and thereby with the allocation of historical costs to periods of time. At this point, cost ac­counting procedure is particularly concerned with the application of manufac­turing cost to units of products to be capitalized in the ending inventory and transferred to cost of goods sold as shipments are made.

More specifically, cost accounting is charged with the tasks of:
1. Establishing costing methods and procedures that permit control and, if possible, reduction or improvement of costs.
2. Aiding and participating in the creation and execution of plans and budgets. 3."Creating inventory values for costing and pricing as described by law and, at times, controlling physical quantities.
4.  Determining company costs and profit for .an annual or shorter ac­counting period, in total or by segment, as determined by management or required by governmental regulations.
5.  Providing management with cost information in connection with prob­lems that involve a choice from among two or more alternative courses, that is, decision making. The decision may be to enter a new market, develop the costs for a new product, discontinue a product line, buy or lease equipment, or take other actions to increase profits or solve problems.

ADVANTAGES OF COST ACCOUNTING
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 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.

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