rr - unting 2 i 1.02 cost acco 4. What is meant by cost, costing and cost : Itis the total sum of all €» goods or services rendered. Costing : Itis a systematic procedure for ascertaining the Cost per unit of ‘output produced or service rendered. | Cost Accounting : | It is the process of accounting for cost which begins with the | recording of income and expenditure and ends with the preparation of | periodical statements and reports. | 2. Define cost, costing and cost accounting. | Cost: | “Cost is a measurement in monetary terms, of the amount of ‘resources used for some purpose’. sxpenditures incurred in the production gy 4 = Anthony Costing : “Costing is the classifying, recording and appropriate allocation of | , ation of expenditure forthe determination of costs of products or services, the | relation of i these costs to sales values and the ascertainment of | ~ Wheldo: Cost Accounting : ¥ “Cost accounting is the process of 9, Classifying, allocating ‘recording, classifying, all land reporting the various ir in ti 279 the various costs incurred in the operation of op i a -Fremgen Explain the objectives / functions of cost accounting The folic re i : Palit Tee Teer he cost per unit al the expen: Ia al the expences have 2. To provide nece sSary d. | 4, odie menaced 2 87825 a guide opie fang To contol the cost withthe het Preparing budgets for the suidanee of a Standards and by fit le of the products and 2 to ensure een included in the cost of He 1.03 4, To advise management on future planning and policies. 5. To present and interpret data for managerial decision making, 6. To organise an effective information system so as to get information from different levels of management, at the right 7. To organise cost reduction programme with the help of various. departmental heads, 8. To organise the intemal audit system to ensure effective working of different departments. What are the advantages of cost accounting ? The following are the advantages of a sound system of cost accounting : 1. It discloses the profit le activities. The management can take steps to eliminate or reduce the |activities which are unprofitable and make them profitable. 2. It’ provides relevant information necessary for finding out estimates and tenders. 3. It enables a concem to measure the efficiency and then to improve it. 4, It'shows the cost incurred and profit made in the business and provide data, which will be helpful for future planning. 5. The perpetual inventory system helps determine the profit or loss without any stock taking. helps in controlling the cost, by comparing the actual cost ith the standard cost. fency of the different workers, which les implementation of suitable plans of wage payments. helps the government and trade unions by providing data for fixation, price control, tari protection, wage level fixation. payment of dividends and settlement of disputes. What are the limitations of cost accounting? 18 of cost accounting : anges with the change of ‘material apportionment of overhead etc. iil) Since, the valuation of stock, work-in-procvess are calculated fon the basis of estimation the actual cost may vary from the estimated cost.6. Distinguish between cost accounting. The following are the main ‘accounting and cost accounting : Financial Accounting 1.09 accounting and Gnancia, differences between financiay Cost Accounting ‘ves information abou! and loss and financial positon of ness to owners and it gives information for planning, [control and decision making to the| management. Financial accounts [compulsory and kept according to Companies Act and Income tax| fact. cost records are voluntary, Recently Government made it lobligatory for some manufacturing] industries. Financial records are Jaccording to the natu Joxpenses. records are __prepared| to the purpose for which costs are incurred. ‘gives the profits of the business| 5 a whole. It shows the profit of each job process / product. . |It reports the results at the end of] lthe accounting period. It gives information to the management as and when required. JOnly monetary transactions are| recorded. Both monetary and non-monetary] transactions are recorded. 7. |Stocks are valued at cost or| Jmarket price whichever is less, [Stocks are valued at cost price. it deals with actual figures. 7. What are the various steps inst According to the requirement organisation should choose and de following steps should be taken at the time of inst It deals with partiy actual figures| land partly with estimates, fo be taken at the time of Won of a costing system? of the management, each own costing system. The in: i The system should be designed alter analysing the nature of Operation, the object of cost Fequired by the management, ting and the type of cost data | fear in their minds thi 1.05 tt should be framed to suit risa Mt should the general organisation of the It should be simple and easy io of perate. All the technical aspects of the business should be taken into consideration. should ensure that cost reports are prepared and presented romplly and regularly to serve all the requirements of management. 8, What practical difficulties would you meet while installing the costing system? Give your suggestions to overcome them. Practical Difficulties: The following are the difficulties in the installation of a costing system and suggestions to overcome them : Lack of support from top management : Difficulties : Mostly the cost accounting system is introduced without the support of the top management and departmental heads. It creates the system is a device to check their activities. Suggestion * To overcome this difficulty, a cost consciousness is to be their minds, by explaining, that the system is meant for their tence from the existing staff members : Difficulties : Whenever a new system is introduced, naturally the ing staff members may offer resistence because they would lose their importance and position in the organisation. ‘Suggestion : To overcome this difficulty, the cost accountant has to impress upon the staff members that the system will create new opportunities and broaden the job of an accountant. iil) Non-cooperation at various levels : Difficulties : While introducing a new system, the supervisors, foreen and others may not co-operate with other departments, in providing the information due to additional paper work. ‘Suggestion : To overcome this dif employees mi properly educated regarding the benefits obtainable from the system. 'v) Shortage of trained staff : Difficulties : At the lage, there may be a shortage of trained staff to handle the work of cost control, cost analysis and cost red ‘Suggestion : To overcome this difficulty, the existing staffs mus properly trained in costing methods and techniques.ie 108 a 1 involve heavy Costs unless it ig ie 18 costing system will a Fe ‘sre Rearing to te needs of the conde aoe sary sophistication and formalities ce ‘Suggestion : To avoid this unnes Sra2G be ignored and proper 5 installation. 9. Explain the following, terms : (6) cost estimation and (d) cost asce’ pervsion should be Made afte, (a) cost unit (b) cost centre rtainment. of quantity in terms of which costs may bg cost of textile is identified with per metre passenger in terms of per Kilometre. b) Cost centre : Cost centr isa part ofan organisation to which costs can be charged, For example, in a laundry, activites such as collecting, marking and ‘washing of dothes are considered as a separate cost centres. ¢) Cost estimation : Cost estimation is the process of pre-delermining the cost of products or services. These cost are addressed well before production ‘and operation process. Estimated costs are future costs which are based on the past actual costs, adjusted with the expected changes in future. 4) Cost ascertainment : Cost ascertainment refers 10 methods used in the process of finding cost. It is the process, of determining costs on the basis of actual costs after the cost has been incurred, 10. Describe briefly the different methods of costing. Itis essential to apply a suitable costin ling method according to the Nature and characteristics of an industry and type of manufacture. lence, the methods to be used for cost ascertainment differ from industry to industry. As per the rtrd cus. As be thelatest CIMA terminology there are two aes ili order costing and, operation 1 Specific Order Costing : Specific order costin, conssing of soporte pn gmeteds_ 316 applicable to the, work batches or contracts. They are eae :bus companies, electricity and rai 1.07 ‘As each job can be separately identified a separate prepared for each job. This method is applicable to Under this method, the product orders are arranged in batches and each batch is treated as one job. Cost is collected for each batch separately. This method is applied in biscuit manufacturing and garments manufacturing organisations. iil) Contract costing : // job which spreads over long periods of time. A separate cost sheet is kept for each contract. This method is used by building contractors and civil engineering contractors. iv) Unit / Output costing: This method is applicable to the industries where the production is continuous and units are identical. This method is applied in industries like brick-making, flour mill, paper mill and the like Ul, Operation Costing : Operation costing methods are applicable to mass production industries. They are : i) Process costing: | This method of costing is suitable for industries where productions continue and it passes through different stages. The finished product of one process becomes raw material of the subsequ , a separate account is opened for each process. chemical industries etc. ii) Service / Operating costing: 2. “This method is suitable for industries which render service such as . Tho cost of service is att - Hour and passenger - determined by Tonne-kiomete, Kil kilometre respectively. iii) Multiple /Composite costing: >, ‘This method is applicable to industries where a number of components are produced separately and assembled subsequently into a final product. Each component differs from others, so it Isa 1.08 ch component necessary to ascertain tne cost of each EST i and autom manufacturing industries aaa of classification of cost. of grouping costs according to 41, Explain the various methods he process Cost classification Is F classification is vial in order to identity beer ai "The following are the important classifications : ) Classification on the basis of Nature : According to this classifi the costs are sub-classified into Material, Labour and Overhead. tion helps to find out the total cost of production and work-in 1) Classification on the basis of Function : ‘According to the functional-wise classifications, costs are divided into the following : 4) Production costs : The costs incurred in making the raw materials into finished output is known as production costs. Example : materials, wages, power, factory rent and the like. b) Administration Example : salaries, office rent, audit fees etc. ©) Selling and distnbution costs: ‘The costs incurred in creating and stimulating demand and making ‘order is known as selling costs. They include advertising and showroom expenses, salesmen commission and Expenditure incurred in the product after its completion tt it the customer is known as distribution costs Example : godown rent, delivery van expenses and the like 4) Research and development costs: he costs of searching for new and im rn proved products and Methods are known as research cost. The costs incurred in the Inplementaton ef dction nore formal produc and method are known as development costs, © Ne PrOSUet on the basis of degree of Traceability : ified and allocated to the cost led direct costs. bour employed in manufacturing 1.09 b) Indirect costs: ‘The expenses which are not chargeable to production and cannot be easily identified with the product or cost centre are called sts. : salaries of time keepers, store keepers, foremen and ing. iv) Classification on the basis of Change In Activity : a) Fixed costs: Costs which remain unchanged are with the increase or decrease in the volume of production is known as fixed costs. Examples : rent, insurance of factory building etc. b) Variable cost Costs which vary almost in direct proportion to the volume of production are known as variable costs. Although, the total jatiable costs vary with the output, the variable costs sroduction remain constant. ariable costs: which are partly fixed and partly variable are known as semi-variable costs. Example : Telephone rent (fixed) and its call charges (variable), pairs and the like. n the basis of Controllabi a) Controllable costs: the control of management are 7 le costs/direct costs are. generally controllable by departmental heads. b) Uncontrollable costs : Costs which are not within the contral of management are called . Most of the fixed / indirect costs are distinguish between the cont tained after the costs incurred are known as ical costs are nothing but actual costs. Costs which are ascertained before the costs incurred are known as pre-determined costs. Pre-determined costs determined on Scientific basis become standard costs. Such costs when compared with actual costs will give the reasons of variance and will help the management take remedial actions.4.19 sification for Managerial Decisio! Marginal cost * f variable costs. Fixed costs arg iis eating out be 10 te ken 0 COMSCran ice ode Ro cost of produtn. fe cs Poses involve payment . Goa ne aa eu Face 2, ation during ade recession. ive rise to cash Such costs are ©) Imputed cost » Gants wbich appear ony cost accounts and do.n0t involve any ‘cash oullay are known as imputed costs. They are called hypothetical costs, which are computed only for managerial decision making Example : rent on own building, salaries of the proprietor. 4) Differential cost: The change in cost due to change in the is called decremental cost. €) Sunk costs ‘Sunk costs are historical or p: created by a decision made building etc are prime examples, Opportunity cost : 't is an earning that might have been earned api vice had been put to some alter {o take managerial decisions. ‘an owned building is to be used for a work and the uilging is the opportunity cost, it should be taken into Consideration for the profitabilty ofthe project. 2 the productive use. This ct labour cost, direct expenses conversion cost. " ene the purchase of an rman ag ge el a en jesent market price. 114 12, What aro the olomonts of cost 7 The elements of cost include direct materials, direct labour and direct overheads and indirect materials, labour and expenses like overhead. 13. Define a Cost Shoot. ‘a documerit which provides for the assembly of the estimated detailed cost in respect of a cost centre or cost unit. - CIMA, London. 44. What is a cost sheet ? How is it prepared 7 Cost sheet is a written statement designed to show the cost of a product . job or process, depending upon the requirement of management for the purpose of contro. 15. Give a specimen format of a cost sheet. SPECIMEN COST SHEET Paras Toco | Canora Direct Materials XXX XXX Died Labour xox] Det Espenaes went rxe PRMECOT | axe] ax A Fat Ovteads nol nae FACTORY or WORISCOT | —— ae] a Ad: Adtaon orton xx] te COST OF PRODUETIN | sax} 3 Ate: Saoganddstosionovateats|__ exe ex TOTAL COST or COST OF SALES XXX! KKK A waa| 74 aa SES | wef