Nature & Scope of Cost A/ Cing
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Transcript of Nature & Scope of Cost A/ Cing
Nature & Scope of Cost A/Cing
Financial accountingCost accounting
Management accounting
Financial accountingFinancial accounting is mainly concerned
with recording, classifying and summarising financial transactions in accordance with generally accepted principles of accounting. Financial accounting records cash and credit transactions of a business according to the nature of expenditure and income so that;
Trading and profit and loss account & Balance Sheet may be prepared.
Statement of sources and applications of cash flow may be prepared.
Management accountingIt is that branch of accounting which
provides information for planning and control to the management.
It assists the management in the creation of policy and in day to day operations of the business.
Cost accountingIt explains the cost of production of a product
or a service according to its components per unit as well as total. It involves classification, accumulation, analysis, assignment and control of cost. It’s need arose because of the limitation of financial accounting.
‘the technique and process of ascertaining cost.’
Limitations of cost accounting Financial accounts show only the net results
of the business.Financial accounts do not make any
difference b/w direct and indirect cost.Financial accounts fail to reveal the weak
points of the business.Financial accounts fail to help in fixation of
selling price.Financial accounts fail to provide control on
material, labour and other expenses. Contd.
Limitations contd.Financial accounts lack to reveal operating
efficiency or inefficiency.Financial accounts fail to provide comparison of
cost of products.Financial accounts lack in performance appraisal
of the organisation.Financial accounts fail to analyse the losses.Financial accounts fail to keep proper records
regarding use of machinery.Financial accounts fail to reveal profits product
wise.
Scope of cost accountingCost calculations
Cost accounting
Cost control
Financial accounting Vs. cost a/csSimilarities;Same vouchers.Double entry system is used in both.Profit and loss is disclosed in both.Cost a/cs is subsidiary and supplementary to
financial a/cs.Reconcilliation is required to prove the
accuracy of both systems.Both systems help in managerial policies.
Differences in both systemsPoints of difference:PurposeRecording method ControlPeriodicity of reportingInformationFixation of selling priceReporting of costAnalysis of profit
contd.
Contd.FiguresStock valuationOperational rather than mandatoryDisclosure of relative efficiencyUse of charts, graphs and diagrams
Principles of cost a/csA cost should be related to its cause.A cost should be charged only after its
incurrence.Abnormal cost should be excluded from
costing.Past costs are not charged to future periods.Principle of double entry system should be
applied.
Objectives of cost accountingTo ascertain cost
Cost control
Determination of selling price
Contd.Ascertainment of profitability
Inter –firm comparison
Control on wastage
Contd.Minimum capital in stocks
Effective information system
Internal audit system
Deciding business policiesTo introduce a new product
Use of idle capacity
Deciding sales mix
Contd.
Make or buy decision
Exporting even at a low cost
Closing down or suspending activities
Advantages of cost a/cs
•Advantages to mgt.
•Advantages to employees
•Advantages to society& nation
Advantages to mgt.Identification of profitable & unprofitable
activities.Calculation of tender price.Formulation of business policies.Helps in decision making.Helps in making comparison.Helps in controlling cost of production.Helps in checking material cost.
Advantages to employeesBetter wages.Distinction b/w efficient & inefficient worker.Higher std. of living.Social recognition of workers.Low labour turnover.Elimination of strikes, lockouts and dispute.More bargaining power of the empolees.
Advantages to society & nationBetter quality products at low prices.Uplift of society as a whole.Economically powerful & progressive nation.Capable to meet international competition.Formulation of better national policies.
Methods of costingJob costing Batch costingContract costingProcess costingUnit costingOperating costing
Features of ideal costing systemSimplicitySuitability to the businessEconomicalFlexibilityComparabilityMinimum official workMinimum change in existing set upUniformity of formsEfficient control on material & labour
Contd.Allocation & apportionment of overheadsReconciliation of cost &financial a/csAccountability should be establishedDuties and responsibility of cost accountant
should be clearly defined.
Installation of costing systemMinimum disturbance to existing set up.
Introduction of costing system in steps.
To control wastage and improve overall efficiency
Steps for installing costing systemObjective and expectation from costing
system should be defined.Studying the structure of organisation.Nature of business to be studied.Reporting system.Co-operation and support of staff.Determining the cost rates.Organising the cost office.Co-ordinating with other deptt. s
Difficulties in installing costing systemLack of support from top level mgt.Opposition by existing accounting staff.Non- cooperation by other staff.Shortage of trained staff.Heavy cost of installation and operation of
costing system.
Objections against cost a/csHighly expensive.UnnecessaryResults are not trust worthy.Excessive use of stationery.Inapplicable in so many cases.