Introduction to Cost Accounting

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The institute of Cost and Works Accountants in England and Wales has defined Cost Accountancy as:

“ The application of costing and cost accounting principles, methods and techniques to the science, art and practice of cost control and ascertainment of profitability. It includes the presentation of information derived there from for the purpose of managerial decision making.”

Therefore, it can be seen that cost accounting serves at keeping costs under control, collecting cost information to help the management in decision making and ascertaining profitability and its causes.

Elements of Cost:

The elements of cost constitute the primary classification of cost according to the factor of expenditure.

1.       MaterialCosts: This refers to the cost of commodities supplied to an organization. Accounting for material cost and its proper control can enable systematic accounting and avoid funds being blocked. It is essential to have a selective inventory control or ABC analysis for materials consumed by the organization.

Category A: Materials that are rather small in number but require large investment.

Category B: Materials that are more but involve less investment.

Category C: Materials that are large in number but involve less investment.

Moreover, it is important to ascertain minimum levels or reorderinglevels of quantity of material to be kept in stock. The duty of the stores keeper is very important, as the stores ledger needs to be actively maintained.

2.       Wages(labor cost): This refers to the cost of remuneration which includes wages, salaries, commissions and bonus. This will include time recording for the workers including overtime. A job card is issued to each worker for the purpose of maintaining the time. Thus the total wages payable to each and every worker can be calculated.

 

3.       Expenses: Expenses may be direct or indirect. Direct expenses are attributable to a work center and include Travelling Expenses incurred, Royalty Paid and so on. Indirect expenses are applicable for the business as a whole and include Selling and Distribution expenses, Office and Administrative Overheads, Depreciation of plant and machinery and so on.

TechniquesofCosting:

Historical Costing: Also called traditional costing this refers to the ascertainment of costs after they have been incurred. It is more of a record rather and cannot help in controlling costs.

Standard Costing: Under this system, a standard is fixed for each item of expenditure. A variance analysis is then made by comparing the actual with the standards. The standards of predetermined costs are arrived at on the basis of information available about the factors affecting the cost. Causes for the variance are analyzed and remedial action taken. This is often used as a tool in budgetary control.

Marginal Costing:  Differentiation between fixed cost and variable costs is the crux of this approach of costing. Here ‘contribution’ is arrived at as the (Price of sales – marginal cost of sales) .Fixed costs are to be recovered from this ‘contribution’. This method of costing is useful to the management for taking policy decisions in reference to (1) pricing of a product (2) whether to make or buy decision (3) selecting the right product mix and so on.

Uniform Costing: This method of costing refers to several undertakings having similar products adopting the same costing principles and practices. This is important for the modern times as it enables inter- firm comparisons and also national and international performance comparisons.

Needof a Costing System:

An organization needs to overcome the reasons for non – implementation of installing a costing system. The reasons may be either the high costs involved or maybe the presence of an assured market.  A costing system is established with the full support of the management. Detailed records should be maintained and a costing system to suit the general nature of the business should be established. Standardization of forms and establishment of clear-cut authority and responsibility is required. This will ensure a prompt and regular reporting system. Acquiring reliable data for decision making is then enabled. Finally, reconciliation between the costing figures and the financial accounts can be made.