Cost Accounting :An Overview

Introduction of Cost Accounting Cost accounting has been developed due to limitations of financial accounting. Financial accounting is concerned with record keeping directed towards the preparation of Profit and Loss.

Account and Balance Sheet.  It provides information regarding the profit and loss which is helpful for the management to control the major functions of business like finance , administration , production and distribution. 

But details regarding operating efficiency to these divisions are lacking in financial accounting. Cost accountancy is the application of costing and cost accounting principles , methods and techniques to the science , art and practice of cost control and the ascertainment of profitability.


Important Terms used in Cost Accounting:

Cost Center: - Cost Center is defined as, ‘a production or service, function, activity or item

of equipment whose costs may be attributed to cost units. A cost center is the smallest organizational sub unit for which separate cost allocation is attempted’. To put in simple words, a cost center is nothing but a location, person or item of equipment for which cost may be ascertained and used for the purpose of cost control. 

For example, a production department, stores department, sales department can be cost centers. Similarly, an item of equipment like a lathe, fork-lift, truck or delivery vehicle can be cost center, a person like sales manager can be a cost center. The main object of identifying a cost center is to facilitate collection of costs so that further accounting will be easy. 

A cost center can be either personal or impersonal, similarly it can be a production cost center or service cost center. A cost center in which a specific process or a continuous sequence of operations is carried out is known as Process Cost Center.

Profit Center: - Profit Center is defined as, ‘a segment of the business entity by which both revenues are received and expenses are incurred or controlled’. (CEMA) A profit center is any sub unit of an organization to which both revenues and costs are assigned. As explained above, cost center is an activity to which only costs are assigned but a profit center is one where costs and revenues are assigned so that profit can be ascertained. 

Such revenues and expenditure are being used to evaluate segmental performance as well as managerial performance. A division of an organization may be called as profit center. The performance of profit center is evaluated in terms of the fact whether the center has achieved its budgeted profits. Thus the profit center concept is used for evaluation of performance

 

Costing System used in practice:

Historical Costing: - In this system, costs are ascertained only after they are incurred and that is why it is called as historical costing system. For example, costs incurred in the month of April, 2007 may be ascertained and collected in the month of May. 

Such type of costing system is extremely useful for conducting post-mortem examination of costs, i.e. analysis of the costs incurred in the past. Historical costing system may not be useful from cost control point of view but it certainly indicates a trend in the behavior of costs and is useful for estimation of costs in future.

Absorption Costing: - In this type of costing system, costs are absorbed in the product units irrespective of their nature. In other words, all fixed and variable costs are absorbed in the products. It is based on the principle that costs should be charged or absorbed to whatever is being costed, whether it is a cost unit, cost center.

Marginal Costing: - In Marginal Costing, only variable costs are charged to the products and

fixed costs are written off to the Costing Profit and Loss A/c. The principle followed in this case is that since fixed costs are largely period costs, they should not enter into the production units. Naturally, the fixed costs will not enter into the inventories and they will be valued at marginal costs only.

Uniform Costing: - This is not a distinct method of costing but is the adoption of identical costing principles and procedures by several units of the same industry or by several undertakings by mutual agreement. Uniform costing facilitates valid comparisons between organizations and helps in eliminating inefficiencies.