Вы находитесь на странице: 1из 12

 What is cost Accounting?

Cost accounting is an approach to evaluating the overall costs that are


associated with conducting business. Generally based on standard accounting
practices, cost accounting is one of the tools that managers utilize to determine
what type and how much expenses is involved with maintaining the current
business model. At the same time, the principles of cost accounting can also be
utilized to project changes to these costs in the event that specific changes are
implemented.

Important of Cost Accounting:

Managers rely on cost accounting to provide an idea of the actual expenses of processes,
departments, operations or product which is the foundation of their budget, allowing them
to analyze fluctuation and the way funds are used socially for profit. It is used in
management accounting, where managers justify the ability to cut expenses for a
company in order to increase that company´s profit. As a tool for internal use, versus a
tool for external users like financial accounting, cost accounting does not need to follow
the GAAP standards (Generally Accepted Accounting Principles) because its use is more
pragmatic.

It creates a financial value out of the production of a product, measuring currency that is
nominal into units that are measured by convention. By taking recorded historic costs a
bit further,it allocates a company´s fixed costs over a specific time period to what items
are actually produced during that period of time, creating a total cost of product
production. Products that were not sold during that period of time produced a "full cost"
of those products, recording them in a complex inventory system that uses accounting
methods of its own that are in compliance with the GAAP standards. Managers are then
able to focus on each period's results as it relates to the "standard cost" of any product.

Any distortions in expenses that were caused by calculating what the overhead of a
product is versus what a unit cost is for companies that specialize in only one specific
product are very minor in industries that mass produce that product with a low fixed one.
Understanding why it varies compared to what was actually planned helps a manager to
save a company money by taking actions that are appropriate to correct that variation in
the future. Variance analysis is a very important part of cost accounting because it breaks
down each variances into many different components of standard and actual one. Some of
these components are material expenses variation, volume variation and labor expenses
variation.

It is a very important part of the management accounting process. In order for managers
to determine the best methods to increase a company's profitability, as well as saving a
company money in the future, cost accounting is a necessary system in the management
of a company's budget, providing important data to analyze fluctuation in company
production expense.
Managerial Accounting:.
Managerial Accounting is the process of tracking, recording and examining costs
associated with the products or actions of an association. Managerial accounting does not
track normally acknowledged accounting principles. In managerial accounting, costs are
considered in units of currency by convention (icfai 2007[online]). Managerial
accounting can also be defined as a kind of cost accounting that covert the supply chain
into economic values. Supply chain is nothing but the sequence of events in the
manufacture process which results in a product. Managers mostly use cost accounting
principles to maintain alternative making to reduce company’s expenses and progress its
productivity.

MPORTANCE OF MANAGERIAL ACCOUNTING:

The main aim of managerial accounting is to improve the efficiency and quality of
operations by providing program owners and all others with suitable and applicable cost
based performance information to permit for nonstop improvement in distributing the
output to outcome the stockholders. Managerial accounting has been developed and used
with all from the beginning times to help all the directors to understand the costs of
running a project. Modern managerial accounting is created during the industrial
revolution during the difficulties of running a large scale business which show the way to
the development of scheme for recording and checking costs to help business proprietors
and managers to finalize and make conclusions.

So, to conclude, for any business unit starting from the smallest business activity to the
largest multinational business to be succeeded requires the use of managerial accounting
concept and practices. This accounting provides data to owners for preparation and
scheming of rating products and services for customers too. The main focus of
managerial accounting is to help the managers for making better decisions. Because of all
these reasons, businesses and organizations hire on managerial accountants and thereby,
they are becoming integral persons of decision making teams instead of just data
providers.
References:

Job Order Costing:


A job order costing system is used in situations where many different products are
produced each period. For example clothing factory would typically made many
different types of jeans for both men and women during a month. In a job order
costing system, costs are traced to the jobs and then the costs of the job are
divided by the number of units in the job to arrive at an average cost per unit.

Job order costing system is also extensively used in service industries. Hospitals, law
firms, movie studios, accounting firms, advertising agencies and repair shops all use
a variety of job order costing system to accumulate costs for accounting and billing
purposes. The details here deal with a manufacturing firm, the same concept and
procedures are used by many service organizations.

The record keeping and cost assignment problems are more complex in a job order
costing system when a company sells many different products and services than
when it has only a single product or service. Since the products are different, the
costs are typically different. A job order costing system requires more effort than a
process costing system. Companies classify manufacturing costs into three broad
categories :(1) direct materials, (2) direct labor, (3) manufacturing overhead.

Measuring Direct Materials Cost in Job Order Costing System:

At the beginning of production process a document known as "bill of materials" is


used for standard products. A bill of materials is a document that lists the type and
quantity of each item of materials needed to complete a unit of standard product. In
case where it is not possible to use a bill of materials because the product is not a
standard product the production staff determines the materials requirements from
the blueprints submitted by the customer.

Application of Manufacturing Overhead:

Manufacturing overhead must be included with direct labor on the job cost sheet
since manufacturing overhead is also a product cost. However, assigning
manufacturing overhead to units of product can be a difficult task. There are three
reasons for this:

1. Manufacturing overhead is an indirect cost. This means that it is either


impossible or difficult to trace these costs to a particular product or job.
2. Manufacturing overhead consists of many different items ranging from the
grease used in machines to the annual salary of production manager.
3. Even though output may fluctuate due to seasonal or other factors,
manufacturing overhead costs tend to remain relatively constant due to the
presence of fixed costs.

Recording Non-manufacturing Costs:

In addition to manufacturing costs, companies also incur marketing and selling costs.
These costs should be treated as period expenses and charged directly to the income
statement and therefore should not go into the the manufacturing overhead account.

Recording Cost of Goods Manufactured and Sold:

When a job has been completed, the finished out put is transferred from the
production department to the finished goods. warehouse. By this time, the
accounting department will have charged the job with direct materials and direct
labor cost and manufacturing overhead will have been applied using the

Advantages and Disadvantages of Job Order Costing System:

One of the primary advantages of job order costing system is that the management
team has ready access to all the costs incurred for each job being completed. This
allows the team to examine each cost incurred, finding out why it happened, and
determine how it can be controlled better in the future, thereby contributing to
better ongoing levels of profitability.

What Is Process Costing?

Process costing is a type of costing system that is used for uniform, or homogeneous,
products. Process costing averages the costs over all units to come to the per unit cost.
This is in contrast to other types of costing systems, such as job-order costing that is used
for products that are in differentiated batches. Unlike job-order costing, process costing is
tracked using a work-in-process account for each department, rather than through
subsidiary ledgers.

Process Costing Procedures

Process costing systems follow specific procedures, and while exact procedures may vary
by company or by industry, they will generally follow these steps:

• While other types of costing start with a sales order, a sales order is not needed
for process costing as it is a continuous process
• The work-in-process accounts are divided by department and are named as such –
for example: Work-in-process – Department Name
• The first department in the process makes the first entry into the work-in-process
account, generally for the direct raw materials
• As the products move from department to department, entries are made to each
work-in-process department account
• Direct labor costs are recorded by period
• Actual overhead costs are recorded; no contra-account is needed because there is
no over- or under-applied overhead due to the actual cost being applied
• Indirect costs are applied to the overhead account in actual amounts
• Normal spoilage is recorded as a cost to the work-in-process account; abnormal
spoilage is removed from the work-in-process account and applied to a separate
account so it can be addressed by management.

When Is Process Costing Appropriate?

Process costing is appropriate when products are homogeneous (or identical). Where job-
order and other types of costing seek to find the cost per unit for batches of differentiated
products, process costing seeks to find the average cost of all units over a period of time.
Therefore, process costing is only appropriate when all units are the same. For example, a
manufacturing company that produces only one homogeneous product may elect to use
process costing.

Profit Planning: Process of developing a profit plan that outlines the planned sales
revenues and expenses and the net income or loss for a time period. Profit planning
requires preparation of a Master Budget and various analyses for risk and what-if
scenarios. Tools for profit planning include the Cost-Volume-Profit (CVP) Analysis and
budgeting.

Limitations of Profit Planning

Profit plans are based upon estimates. Inevitably, many conditions you expected when the
plan was prepared will change. Crystal balls are often cloudy. The further down the road
one attempts to forecast, the cloudier they become. In a year, any number of factors can
change, many of them beyond the control of the company. Customers' economic fortunes
may decline, suppliers' prices may increase, or suppliers' inability to deliver may disrupt
your plan.

The profit plan requires the support of all responsible parties. Sales quotas must be
agreed upon with those responsible for meeting them. Expense budgets must be agreed
upon with the people who must live with them. Without mutual agreement on objectives
and budgets, they will quickly be ignored and serve no useful purpose.

Finally, profit plans must be changed from time to time to meet changing conditions.
There is no point in trying to operate a business according to a plan that is no longer
realistic because conditions have changed.

Advantages vs. Disadvantages

Despite the limitations of profit planning, the advantages far outweigh the disadvantages.
A realistic plan, established yearly and re-evaluated as changing conditions require will
provide performance guidelines that will help you control every aspect of your business
with a minimum of analysis and digging for financial facts.

C.V.P analysis:

Cost-volume-profit analysis (CVP), or break-even analysis, is used to compute the


volume level at which total revenues are equal to total costs. When total costs and total
revenues are equal, the business organization is said to be "breaking even." The analysis
is based on a set of linear equations for a straight line and the separation of variable and
fixed costs. Total variable costs are considered to be those costs that vary as the
production volume changes. In a factory, production volume is considered to be the
number of units produced, but in a governmental organization with no assembly process,
the units produced might refer, for example, to the number of welfare cases processed.

CVP analysis is best viewed within the relevant range, that is, within our previous actual
experience. Outside of that range, costs may vary in a nonlinear manner. The straight-line
equation for total cost is:

Total cost = total fixed cost + total variable cost

Total variable cost is calculated by multiplying the cost of a unit, which remains constant
on a per-unit basis, by the number of units produced. Therefore the total cost equation
could be expanded as:

Total cost = total fixed cost + (variable cost per unit number of units)

Total fixed costs do not change.

A final version of the equation is:

Y = a + bx

The financial information required for CVP analysis is for internal use and is usually
available only to managers inside the firm; information about variable and fixed costs is
not available to the general public. CVP analysis is good as a general guide for one
product within the relevant range. If the company has more than one product, then the
contribution margins from all products must be averaged together.

DISCUSS THE LIMITATIONS OF CVP ANALYSIS:

A number of limitations are commonly mentioned


with respect to CVP analysis:
1. The analysis assumes a linear revenue function
and a linear cost function.
2. The analysis assumes that what is produced is
sold.
3. The analysis assumes that fixed and variable
costs can be accurately identified.
4. For multiple-product analysis, the sales mix is
assumed to be known and constant.
5. The selling prices and costs are assumed o be
known with certainty .

Standard Cost

Learning Objectives

• To understand the meaning of standard costing, its meaning


and definition
• To learn its advantages and limitations
• To learn how to set of standards and determinations
• To learn how to revise standards

Introduction

You know that management accounting is managing a business through accounting


information. In this process, management accounting is facilitating managerial control. It
can also be applied to your own daily/monthly expenses, if necessary. These measures
should be applied correctly so that performance takes place according to plans. Planning
is the first tool for making the control effective. The vital aspect of managerial control is
cost control. Hence, it is very important to plan and control costs. Standard costing is a
technique which helps you to control costs and business operations. It aims at eliminating
wastes and increasing efficiency in performance through setting up standards or
formulating cost plans.

Meaning of Standard

When you want to measure some thing, you must take some parameter or yardstick for
measuring. We can call this as standard. What are your daily expenses? An average of
$50! If you have been spending this much for so many days, then this is your daily
standard expense.

The word standard means a benchmark or yardstick. The standard cost is a predetermined
cost which determines in advance what each product or service should cost under given
circumstances.
In the words of Backer and Jacobsen, “Standard cost is the amount the firm thinks a
product or the operation of the process for a period of time should cost, based upon
certain assumed conditions of efficiency, economic conditions and other factors.”

Definition

The CIMA, London has defined standard cost as “a predetermined cost which is
calculated from managements standards of efficient operations and the relevant necessary
expenditure.” They are the predetermined costs on technical estimate of material labor
and overhead for a selected period of time and for a prescribed set of working conditions.
In other words, a standard cost is a planned cost for a unit of product or service rendered.

The technique of using standard costs for the purposes of cost control is known as
standard costing. It is a system of cost accounting which is designed to find out how
much should be the cost of a product under the existing conditions. The actual cost can be
ascertained only when production is undertaken. The predetermined cost is compared to
the actual cost and a variance between the two enables the management to take necessary
corrective measures.

Advantages

Standard costing is a management control technique for every activity. It is not only
useful for cost control purposes but is also helpful in production planning and policy
formulation. It allows management by exception. In the light of various objectives of this
system, some of the advantages of this tool are given below:

1. Efficiency measurement-- The comparison of actual costs


with standard costs enables the management to evaluate
performance of various cost centers. In the absence of standard
costing system, actual costs of different period may be
compared to measure efficiency. It is not proper to compare
costs of different period because circumstance of both the
periods may be different. Still, a decision about base period can
be made with which actual performance can be compared.
2. Finding of variance-- The performance variances are
determined by comparing actual costs with standard costs.
Management is able to spot out the place of inefficiencies. It
can fix responsibility for deviation in performance. It is
possible to take corrective measures at the earliest. A regular
check on various expenditures is also ensured by standard cost
system.
3. Management by exception-- The targets of different
individuals are fixed if the performance is according to
predetermined standards. In this case, there is nothing to worry.
The attention of the management is drawn only when actual
performance is less than the budgeted performance.
Management by exception means that everybody is given a
target to be achieved and management need not supervise each
and everything. The responsibilities are fixed and every body
tries to achieve his/her targets.
4. Cost control-- Every costing system aims at cost control
and cost reduction. The standards are being constantly
analyzed and an effort is made to improve efficiency.
Whenever a variance occurs, the reasons are studied and
immediate corrective measures are undertaken. The action
taken in spotting weak points enables cost control system.
5. Right decisions-- It enables and provides useful
information to the management in taking important decisions.
For example, the problem created by inflating, rising prices. It
can also be used to provide incentive plans for employees etc.
6. Eliminating inefficiencies-- The setting of standards for
different elements of cost requires a detailed study of different
aspects. The standards are set differently for manufacturing,
administrative and selling expenses. Improved methods are
used for setting these standards. The determination of
manufacturing expenses will require time and motion study for
labor and effective material control devices for materials.
Similar studies will be needed for finding other expenses. All
these studies will make it possible to eliminate inefficiencies at
different steps.

Limitations of Standard Costing

1. It cannot be used in those organizations where non-standard


products are produced. If the production is undertaken
according to the customer specifications, then each job will
involve different amount of expenditures.
2. The process of setting standard is a difficult task, as it
requires technical skills. The time and motion study is required
to be undertaken for this purpose. These studies require a lot of
time and money.
3. There are no inset circumstances to be considered for fixing
standards. The conditions under which standards are fixed do
not remain static. With the change in circumstances, if the
standards are not revised the same become impracticable.
4. The fixing of responsibility is not an easy task. The
variances are to be classified into controllable and
uncontrollable variances. Standard costing is applicable only
for controllable variances.
For instance, if the industry changed the technology then the system will not be suitable.
In that case, we will have to change or revise the standards. A frequent revision of
standards will become costly.

Setting Standards

Normally, setting up standards is based on the past experience. The total standard cost
includes direct materials, direct labor and overheads. Normally, all these are fixed to
some extent. The standards should be set up in a systematic way so that they are used as a
tool for cost control.

Various Elements which Influence the Setting of Standards

Setting Standards for Direct Materials

There are several basic principles which ought to be appreciated in setting standards for
direct materials. Generally, when you want to purchase some material what are the
factors you consider. If material is used for a product, it is known as direct material. On
the other hand, if the material cost cannot be assigned to the manufacturing of the
product, it will be called indirect material. Therefore, it involves two things:

• Quality of material
• Price of the material

When you want to purchase material, the quality and size should be determined. The
standard quality to be maintained should be decided. The quantity is determined by the
production department. This department makes use of historical records, and an
allowance for changing conditions will also be given for setting standards. A number of
test runs may be undertaken on different days and under different situations, and an
average of these results should be used for setting material quantity standards.

The second step in determining direct material cost will be a decision about the standard
price. Material’s cost will be decided in consultation with the purchase department. The
cost of purchasing and store keeping of materials should also be taken into consideration.
The procedure for purchase of materials, minimum and maximum levels for various
materials, discount policy and means of transport are the other factors which have bearing
on the materials cost price. It includes the following:

• Cost of materials
• Ordering cost
• Carrying cost

The purpose should be to increase efficiency in procuring and store keeping of materials.
The type of standard used-- ideal standard or expected standard-- also affects the choice
of standard price.
Setting Direct Labor Cost

If you want to engage a labor force for manufacturing a product or a service for which
you need to pay some amount, this is called wages. If the labor is engaged directly to
produce the product, this is known as direct labor. The second largest amount of cost is of
labor. The benefit derived from the workers can be assigned to a particular product or a
process. If the wages paid to workers cannot be directly assigned to a particular product,
these will be known as indirect wages. The time required for producing a product would
be ascertained and labor should be properly graded. Different grades of workers will be
paid different rates of wages. The times spent by different grades of workers for
manufacturing a product should also be studied for deciding upon direct labor cost. The
setting of standard for direct labor will be done basically on the following:

• Standard labor time for producing


• Labor rate per hour

Standard labor time indicates the time taken by different categories of labor force which
are as under:

• Skilled labor
• Semi-skilled labor
• Unskilled labor

For setting a standard time for labor force, we normally take in to account previous
experience, past performance records, test run result, work-study etc. The labor rate
standard refers to the expected wage rates to be paid for different categories of workers.
Past wage rates and demand and supply principle may not be a safe guide for determining
standard labor rates. The anticipation of expected changes in labor rates will be an
essential factor. In case there is an agreement with workers for payment of wages in the
coming period, these rates should be used. If a premium or bonus scheme is in operation,
then anticipated extra payments should also be included. Where a piece rate system is
used, standard cost will be fixed per piece. The object of fixed standard labor time and
labor rate is to device maximum efficiency in the use of labor.

Setting Standards of Overheads

The next important element comes under overheads. The very purpose of setting standard
for overheads is to minimize the total cost. Standard overhead rates are computed by
dividing overhead expenses by direct labor hours or units produced. The standard
overhead cost is obtained by multiplying standard overhead rate by the labor hours spent
or number of units produced. The determination of overhead rate involves three things:

• Determination of overheads
• Determination of labor hours or units manufactured
• Calculating overheads rate by dividing A by B
The overheads are classified into fixed overheads, variable overheads and semi-variable
overheads. The fixed overheads remain the same irrespective of level of production,
while variable overheads change in the proportion of production. The expenses increase
or decrease with the increase or decrease in output. Semi-variable overheads are neither
fixed nor variable. These overheads increase with the increase in production but the rate
of increase will be less than the rate of increase in production. The division of overheads
into fixed, variable and semi-variable categories will help in determining overheads.

Вам также может понравиться