Chapter 1
Basic Cost Concepts
Learning Objectives
• To understand the meaning of different costing terms to understand different costing methods
• To have a basic idea of different costing techniques
• To understand the meaning of cost sheet
In order to determine and take a dispassionate view about what lies beneath the surface of accounting figures, a financial analyst has to make use of different management accounting techniques. Cost techniques have a precedence over the other techniques since accounting treatment of cost is often both complex and financially significant. For example, if a firm proposes to increase its output by 10%, is it reasonable to expect total cost to increase by less than 10%, exactly 10% or
…show more content…
are also given due consideration by management before deciding upon the price but the cost plays a dominating role.
Determining and Controlling Efficiency
Cost accounting involves a study of various operations used in manufacturing a product or providing a service. The study facilitates measuring the efficiency of an organization as a whole or department-wise as well as devising means of increasing efficiency.
Cost accounting also uses a number of methods, e.g., budgetary control, standard costing etc. for controlling costs. Each item viz. materials, labour and expenses is budgeted at the commencement of a period and actual expenses incurred are compared with budget. This greatly increases the operating efficiency of an enterprise.
Facilitating Preparation of Financial and Other Statements
The third objective of cost accounting is to produce statements whenever is required by management. The financial statements are prepared under financial accounting generally once a year or half-year and are spaced too far with respect to time to meet the needs of management. In order to operate a business at a high level of efficiency, it is essential for management to have a frequent review of production, sales and operating results. Cost accounting provides daily, weekly or monthly volumes of units produced and accumulated costs with appropriate analysis. A developed cost accounting system provides immediate information regarding stock of raw
According to Epstein and Buhovac, (2014), costing system is a process designed to monitor the costs incurred in a certain business. Costing systems are meant to advise the management on how to choose the most appropriate course of action with cost efficiency and capability. According to Cardinaels and Labro (2009) costing system provides detailed cost information needed by management needs to control current operations with the aim of improving the future. Below are some of the costing systems that are common to many organizations (Epstein & Buhovac, 2014).
3. Cost Accounting – A vital piece of management accounting, it fulfils both inward and outer groups to the association and is for the most part concerned with costs, costing and cost conduct.
Managerial accounting is essential for decision making. Making the best choice depends on the manager's goals, the anticipated results from each alternative, and the information available when the decision is made (Schneider, 2012). The different techniques associated with managerial accounting are very helpful in the decisions that need to be made. In order to truly understand decision making with managerial accounting one must first discern exactly what managerial accounting means and some of the techniques associated with it. The definition of managerial accounting will be discussed along with the techniques of cost management techniques, budgeting, and quality control.
A continuation of Accounting Principles I & II, Managerial Accounting concentrates on the development and analysis of accounting information for managerial planning and control. Looking at the accounting information needs inside a company, this course covers the concepts of cost accumulation, cost behavior patterns, cost-volume-profit relationships, profit planning, budgeting, pricing decisions and capital decisions. Students completing this course are expected to be able to differentiate between financial and managerial accounting and apply managerial accounting concepts to internal financial decision making scenarios. In addition to learning about accounting information, students will be expected to perfect their learning, thinking, communication and teamwork skills.
Various terms are used to describe costs. Having an understanding of these terms will provide a better insight to managers and companies on making budget decisions, efficiently. Not only the ones described above should be considered, but also all types of costs related to the decision in effect. Efficient managers will considered all aspects related to the analyses in question.
In addition to inherent difficulties in determining the cost of output, management fails to recognize that different cost measurement are needed for different purposes.. If cost information is to be used intelligently, management must understand that any cost figure has inherent limitation and that no
The management of the cost of the company's product is an important part, which a cost accountant has to deal with. The profit of the company depends on the extent of the control on the production cost of the product. As the increase in sales and the profitability is the main aim of the management, so it will attract more conflicts of views and multiple sources of actions. A cost accountant has work in this direction and clears the things to the management so that they can have appropriate decisions with regard to the product, its costs and the company's profits at
Bhimani, A., Horngren, C., Datar, S., Rajan, M. et al. (2012) Management and Cost Accounting. 5th ed. Edinburgh: Prentice Hall, p.369 - 378.
Costing system is the most important part for any business or engineering company. Cost accounting is necessary for a company to be able to exercise control over the actual costs incurred compared with planned expenditure. From the point of view of cost control, a costing system should not only be able to identify any costs that are running out of control but should also provide a tool that can assist in determining the action that is required to doing right things.
Are all the costs that are not included in p product costs. These costs are expensed on the income statement in the period in which they are incurred. All Selling, General and Administrative Costs a e considered are co s de ed to be pe od costs period costs.
Cost management is worried with the way toward arranging and controlling the financial plan of a project or business. It incorporates activities, for example, arranging, evaluating, planning, financing, funding, overseeing, and controlling costs so that the project can be finished inside the affirmed spending plan. Cost management covers the full life cycle of a project from the underlying arranging stage towards measuring the genuine cost execution and project completion.
Cost audit is basically the analysis of cost accounts and also checking on the efficiency of cost accounts and to ensure that these accounts are matching the predetermined cost accounting plans. It also determines the accuracy of the cost accounts. They also ensure that the accounts conform to the principles, plans, procedures and objectives. It shows the deviation in plans. It is also known as efficiency audit as it checks the efficiency of working of predetermined plans. It consists of the sum total of expenditure and revenue and determines the true work efficiency of a plan. It is used to assess the operational efficiency and resource management of an organisation. It is essentially the verification of the cost accounts so as to ascertain the variations in the efficiency of the organisation.
Cost Management is the procedure of arranging and controlling the financial budget of a business. Cost Management is a type of management accounting that permits a business to anticipate approaching consumptions to diminish the possibility of going over allocated budget. Numerous organizations utilize cost management strategies for particular projects, and additionally for the overall action plan of the organization. While applying it to a project, expected expenses are figured while the task is still in the arranging period and are affirmed in advance. Companies use few software and applications for cost management, for example,
Cost accounting, thus, provides information to the management for decision of all sorts. It serves multiple purposes on account of which it is generally indistinguishable from management accounting.
Providing Basis for Managerial Decision – Making: - Costs accounting helps the management in formulation operative policies. These policies may relate to any of the following matters:-