Meaning
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’.