why should there be costing in the field of business

7/29/2019 Why Should There Be Costing in the Field of Business

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1. Why should there be costing in the field of business?

Costing is a branch of accounting. It helps us to classify, record, and allocate the expenditure for thedetermination of costs of product. Expenditure involved in business has to be ascertained to fix the priceof a product produced. The expenditure is to be understood in terms of material, labour and other directand indirect expenses. The major purpose of such classification is to estimate the profit and tounderstand its relationship with costs and price. The three elements of a transaction i.e., cost, profit andprice are necessary components of any business activity.

2. Define cost accountingThe term 'Cost Accounting’ refers to the recording of all incomes and expenditures and ends with thepreparation of periodical statements and reports for ascertaining and controlling costs.

Management accounting consists of some essential activities:

a. Estimation of cost is one of the basic tasks of management. If it is estimated, the management will use

the estimation in control process and planning decisions.

b. Controlling the cost is another function of management. Here the cost incurred is compared with task

performed. Corrective measures should be initiated when costs are excessive.

c. Performance evaluation is another part of management accounting. Managers are often monitored.

Their performance should be consistent with the goals of the organisation. For which, a comprehensivereporting system is required.

d. It supplies information to the management for planning and decision making.

6. List the advantages of cost accounting. Providing information to the insiders and outsiders with respect to production, cost, materials,

labour, stores, plant capacity etc., which assist out planning Revealing profitable and unprofitable activities which help the management to reduce or

eliminate wastages and inefficiencies such as under utilization, idle time, spoilage of material etc., Systematic management of cost which will lead to effective product pricing. Maintaining perpetual inventory system, this ensures preparation of interim profit and loss

account. Aiding in formulation of policies related to product, price etc.,

Comparison of cost between different periods, products, departments or firms. Revealing idle capacity, this would help the management to deal bottlenecks. Ascertainment of cost and profit more frequently and examination of their causes in details. Taking decisions based on facts and formulation of suitable polices for various matters. (Level of

output, make or buy decision, replacement of old equipment, shut down or continue, introductionof new products or elimination, acceptance of a special order and replacement of labour withmachinery.)

Define the term cost

Cost means the amount of expenditure incurred on, or attributable to, a given thing.



Cost Accounting

1) It helps us to ascertain the cost of

goods produced.

2) It provides required information to

the management.

3) It need not be followed by a system of

external audit

4) It classifies the costs into material,

labour, fixed overhead and variableoverhead.

5) Cost sheet is main format of cost

accounting

6) It does not form a basis for taxassessment.

7) Variance analysis is to identify thefavourable and adverse differencebetween standard cost and actual

cost.

8) Cost accounting facilitates the

presentation of cost information atregular intervals.

9) Profit or loss is estimated on specificproduct, branch, department or job.

10) It is an effective control device

11) Unit wise accounting is also prepared.

Financial Accounting

It helps us to know operational resultsand financial position of business.

It provides information partiesinvolved in business internally andexternally.

Audit is a statutory obligation

Transactions are divided into debit andcredit terms.

Trading and Profit & Loss Account andBalance Sheet are two consolidatedfinancial statements.

It forms a basis for deciding the taxliabilities of the business.

It records only actual transactionsoccurring in the course of businessoperations

Financial statements are annuallypresented.

It presents operational results of theentire business.

Financial accounting is not a control

device. Rather, accounting ratios canbe computed with financialaccounting.

Monetary units alone are yardstick of financial accounting.



Users of financial and accountinginformation

■ Employees to assess the potential for providingcontinued employment and assess levels of remuneration■ General public to assess general employment opportunities, social, political and environmentalissues, and to consider potential for investment■ Government value added tax (VAT) and corporate taxation, Government statistics, grants and financialassistance, monopolies and mergers■ Investment analysts investment potential for individuals and institutions with regard to past and futureperformance, strength of management, risk versus reward■ Lenders the capacity and the ability of the company to service debt and repay capital■ Managers / directors to a certain extent an aid to decision-making, but such relevant information shouldalready have been available internally■ Shareholders / investors a tool of accountability to maintain a check on how effectively thedirectors/managers are running the business, and to assess the fi nancial strength and futuredevelopments■ Suppliers to assess the long-term viability and whether the company is able to meet its obligations and paysupplier s on an ongoing basis.■ Competitors as part of their industry competitive analysis studies to look at market share, and financialstrength■ Customers to determine the ability to provide a regular, reliable supply of goods and services, and to assesscustomer dependence

The three main purposes of accounting are: to provide records of transactions and a scorecard of results; to direct attention to problems; to evaluate the best ways of solving problems

Statement of Cash Flows

The statement of cash flows explains the change in a company's cash (and cash equivalents)

during the time interval indicated in the heading of the statement. The change is divided intothree parts: (1) operating activities, (2) investing activities, and (3) financing activities.

Management accounting or managerial accounting is concerned with the provisions and use of

accounting information to managers within organizations, to provide them with the basis to make

informed business decisions that will allow them to be better equipped in their management and

control functions

The need and importance of bank reconciliation statement can be summarized in the

following points.

* Bank reconciliation statement ensures the accuracy of the balances shown by the pass book

and cashbook.* Bank reconciliation statement provides a check on the accuracy of entries made in both the

books.

* Bank reconciliation statement helps to detect and rectify any error committed in both the

books.* Bank reconciliation statement helps to update the cash book by discovering some entries not

yet recorded.

* Bank reconciliation statement indicates any undue delay in the collection and clearance of

some cheques.

http://en.wikipedia.org/wiki/Accounting





Accounting Cycle

The accounting cycle is the collection of the three stages of accounting. The entire accountingcycle process takes place over the period of one month. The same accounting process is repeated

in its entirety each month. In order, the stages of accounting are data collection, data processing

and reporting.

Data Collection

Collecting and analyzing data is the first stage of the accounting cycle. Throughout the month,

various business transactions occur that must be collected in your accounting software. Typical

transactions that a business may have include sales receipts, customer returns, purchase orders

for inventory, payroll and bank deposits. Each financial transaction must be noted in theaccounting software for the business.

Data Processing

As financial transactions are entered by the accounting department, they must be processed. This

includes making journal entries so that your accounts balance. For every transaction entry theremust be a balancing entry, which are usually referred to as simply debits and credits. For

example, if you pay an invoice the entry is listed under accounts payable and the balancing entry

may be listed under cash to show that cash was taken out to pay the invoice. As the data is

collected and processed, a trial balance is run on the accounting software to make sure all of theaccounts balance. This is usually done before the month's end to confirm that things are running

smoothly in the accounting department. If the accounts do not balance, this results in the need for

adjustment entries.

Reporting

At the end of the month, the data collection and processing comes to a close, to make way forfinancial reporting. Using the data that was collected and processed, the accounting department

creates financial statements for the month. Financial statements include the balance sheet and

income statement. These financial reports are only created once a trial balance shows that allaccounts balance for the month. When the financial reports are created, it closes the books for the

month so that the accounting department can start fresh for the next month. The closing balance

then becomes the opening balance for the next month.

why should there be costing in the field of business

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