p 3 ach 1 introduction to cost accounting

8/9/2019 p 3 Ach 1 Introduction to Cost Accounting

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IPCC Paper 3: Cost Accounting Chapter 1

BY

CA. B.N. Pattabhi, M.Com, FCA

Cost Accounting An Introduction


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Salutations

DEDICATED TO MY

NOBLE,

EVER LOVING,

EVER INSPIRINGMOTHER

LALITAMMA


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Learning Objectives


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Introduction to Cost Accounting

Cost Accounting is basically a MIS i.e.

A Management Information System

Its an aid to the Management in its PrimaryFunction of Decision Making

It aims at Ascertainment of Cost for the purposeof Cost Analysis and Control


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Evolution of Cost Accounting

An Intro.


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Before Industrial Revolution

Sellers Market since Skilled

Labourers were very few and Buyerswere unlimited i.e

Low Production High Demand

Price was determined by Sellers

No Competition because of HighDemand

Hence cost was not relevant


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Industrial Revolution - Initial Stage

Automation of Production Process

Limited Production but still short of Demand

Whatever was produced was Sold

Prices were still high and unrelated to cost

Progression towards Large Scale Production and increase in efficiency


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Developments in the Field of

Management

Different concepts evolved in the field of

Management like

1 Scientific Management Theory

2 Time & Motion Study

3 Functional Departmentalisation

4 Specialisation etc


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Industrial Revolution - Maturity Stage

Oragnisations mastered Efficient Processes

Scaled up production to derive Economies of Large Scale Operation

In fact there was a glut in the market

For the First Time Supply was more than Demand

Organisations Started Competing for Market Share

Price Competition crept in based on Financial Statements

Price Competition turned into a cut throat price competition based on historical Info

Organisations survived for a year or two based on reserves


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Industrial Revolution-Maturity Stage 2

Organisations started going Bankrupt

Even though the efficiency levels were high i.e. upwards of 99% and Production Processes werehighly efficient still Organisations went bankrupt

Management scientists or Managers started searching for the reasons of bankruptcy

Fixing the price based on earlier periods Financial Statements

The information based on which pricing decisions were taken were old and not up to date

Managers zeroed in on the reasons for bankruptcy i.e

Managers started realising that the basis of their decisions were incorrect

The need for an efficient MIS was being felt by managers across the cadres

An MIS in tune with the changes / trends in the management was the need of the hour


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Financial Accounting System Limitations

Its a post mortem of transactions

No mechanism to consider the future trend i.e. no mechanism for precise estimates

No mechanism for considering the present trends / changes in the situations

Information presented is historical and based on historical cost basis

Stock Records do not form part of Financial Records

Concept of Work in progress does not exist

Concept of issue and consumption does not exist

The time gap between recording and reporting is very long


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Evolving Cost Accountancy

To meet the changingneeds of the Managersa new system of MISemerged known asCost Accountancy

The New MIS had allthe mechanisms andtechniques to overcome

the shortcomings ofFinancial Accounting

System

Cost Accountancy isForward Looking,

Analytical and Current


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Definitions

Cost Accounting


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Cost

It is the sum total of expenditureIncurred or Attributable toproduce an article or thing orrender a Service.

The expenditure may be real orimplied

The payment is not a criteria

To Sum up its the aggregate of

value of all factors of productionsused to produce an article or athing or render a Service


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Costing Costing is a term used to

collectively refer to all thosetechniques, Processes andactivities that are used to

ascertain cost It is the process of ascertainment

of cost

It includes all those activities

which are performed to collectinformation for the ascertainmentof cost


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Cost Accounting

It is the process of accountingfor costs or the physicalprocess of collecting and

recording of expenditure &income, identifying the basesfor collecting of informationand culminates in preparation

of reports and statements thatare used for ascertainmentand control of costs


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Cost Accountancy

It is the process of applyingcosting and cost accounting

principles, methods, techniques

and processes to the Science art

and practice of Ascertainment ofcost for the purpose of analysis

and control of cost.

It deals with preparation of MIS

reports that form the basis ofmanagerial decision making


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Scope and Objective

Of Cost Accounting


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Scope

Cost Book Keeping

Cost System

Cost Ascertainment

Cost Analysis

Cost Comparison

Cost Control

Cost Reports


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Objectives & Scope

The Primary objective of CostAccounting is to provide themanagement with analytical,

accurate and reliable reports &information (MIS Report) based onwhich management can takeinformed decisions

In a nutshell Cost Accounting is anAid or tool in the hands ofManagement which facilitatesdecision making


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Objectives & Scope - 2

Theoretically the objectives are

Ascertainment of Cost

Determination of Selling Price

Cost Control and Cost Reduction

Ascertaining the profit of each

activity

Assisting Management in DecisionMaking


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Ascertainment of cost

Post Costing

Ascertainment of cost based on or by

analysing Financial Information is called aspost costing, it is helpful in Cost Plus

Contracts, wherein the price will have to be

determined based on cost plus an agreed

rate of profit on cost


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Continuous Costing

It is a process which aims at collecting costs

as and when they are incurred. Its a process

which involves a careful estimation of certainImplied costs such as overheads etc. This

system of costing aims at ascertainment of

cost of completion simultaneously with the

completion of the production/job


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Determination of Selling Price

Cost of Production is one of the factors for

determining the price of a product or service.

Cost Accounting helps in determining theSelling Price of a product or Service

It is pertinent to note here that the market

maxim is Cost is a fact, Price is a policy


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Cost Control

One of the objectives of Cost Accounting is

cost control. Once the cost is ascertained

the next step is to analyse such costs with aview to exercise control over them by clearly

establishing objectives & achieving optimum

efficiency and comparing the performance

with the objectives set


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Cost Reduction

Its defined as achieving real and permanent

reduction in the unit cost of manufacturing a

product or rendering a service withoutcompromising on either the Quality of the

product or impairing the suitability of the

product for the intended use


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Cost Reduction Continued

It also implies retaining of the essential

characteristic features & quality of the

product or service. It is achieved throughconstant innovation and improvisation of

processes, so that there is a permanent and

real reduction in cost


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Cost Control & Cost Reduction

ost ontrol ost Reduction

It maintains cost

Aims at achieving lowest

possible cost

Focuses on past &

Present

It is preventive in nature

It has a limited target

Aims at reducing the cost

Aims at optimising the

costby challenging the

practices

Focuses on present &

future

It is corrective in nature

It is a continuous process


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Ascertainment of Profit of each activitySince cost information is collected activity

wise ascertainment of profit activity wise

becomes easier. In financial accountingsystem it may not be possible to identify the

profit of each activity.

In fact profit can be ascertained for each

activity level.


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Assisting Management in Decision MakingThis is one of the most important & relevant

objectives of Cost Accounting. In fact it is

the genesis of Cost Accounting.It is this need of the management for reliable

and accurate information for basing its

decision that gave birth to aseparate system

of accounting called Cost Accounting


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Cost Centre

A Cost Centre is defined as a person,location or an item of equipment or a

combination of these for which cost is

ascertained for the purpose of analysis andcontrol.

Cost Centre can be Personal or Impersonal


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Cost Unit

It is a physical measure or unit of product, Serviceor Time or a combination of these for which costs

may be ascertained.

The cost unit may differ from product to product and

service to service depending on the inherent natureof the product or service or the process


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Cost Object

Anything for which a separate measurementof cost is intended is called as a cost object.

The cost object may be a Product, Service,

Project, Customer, an Activity etcA Cost object is used to ascertain the selling

price of the Product or Service


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Elements of Cost

These are akin to heads of account in financialaccounting

Elements of cost are those items of cost which form

a significant portion of the total cost, which deserve

to be mentioned separately.

In a nutshell elements of cost are those expenses

incurred which are separately identified in

ascertaining the cost


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Cost Accounting System


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Installation of a Costing System

The prime considerations for installation of a costingsystem are

Economic Viability i.e. whether the cost

incurred on installing a costing system justifythe benefits derived there from.

Managements attitude towards having a

sound MIS. If the management is averse tousing an MIS report, then installing a costing

system doesnt make sense


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Factors to be considered

Objective Type of Business

General Organisation

Technical Details Change in Operations

Method of Maintenance of Cost Records

Information

Accuracy

Informative and Simple


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Essentials of a Good Costing System

Informative and SimpleAccuracy

Support from Management

Cost Benefit Precise Information

Procedure

Trust


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Cost Accounting - Relationship

An Intro.


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Relationship of Cost Accounting

With Financial Accounting, Management Accountingand Financial Management

Cost Accounting is a branch of accounting, while

Financial Accounting aims at preparation and

presenting General Purpose Financial Statements,Cost Accounting aims at preparation and

presentation of MIS reports which are for the

exclusive use of Management.


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Relationship Continued

Management Accounting Aims at analysing theFinancial Statements and providing inputs to the

management based on the analysis and focuses on

certain set parameters such as Gross Profit,

Operating Margin, etc Whereas cost accounting is a real time exercise

which furnishes information on income &

Expenditure as and when it is incurred


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Relationship Continued

Financial Management aims at maximising thewealth of an organisation through profit

maximisation whereas cost accounting aims at

ascertainment of cost for the purpose of Analysis,

control and reduction.To sum up cost accounting is an additional

supplementary and indispensible source of

information for the management in its decision

making process


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Classification of Cost

On the basis of elements Viz Material Direct & Indirect

Labour Direct & Indirect

Expenses Direct & Indirect Overheads Production/works/Factory

Administration, Selling & Distribution


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Classification of Cost continued

By Function Prime Cost

Factory Cost

Cost of Production Cost of Goods Sold

Cost of Sales


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On the basis of variability or behaviourFixed Cost

Variable Cost

Semi variable CostBy Controllability

Controllable Cost

Uncontrollable Cost


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By NormalityNormal Cost

Abnormal Cost


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Lesson Summary


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Thank You

p 3 ach 1 introduction to cost accounting

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