OBJECTIVES COST ACCOUNTING
- Cost ascertainment - Refers to the determination of the various elements of cost incurred by the entitling either for manufacturing a product or for rendering a service. Cost ascertainment is required for cost control, cost reduction, pricing product and service and also for determination of profitability.
- Cost Estimation - Refers to the predetermination of the cost of production or cost of rendering service. The cost is estimated based on previous cost accounting records, and it is required for tenders and quotations. The estimated cost is again used for cost control through the application of standard costing technique.
- Cost presentation - Refers to the system of reporting the cost data to various departments and various levels of management. The basic form of cost presentation is of cost sheet.
- Cost control - The executive action is required for eliminating and minimizing the wastage and losses in the different elements of cost.
Steps in cost control
- Fixing standard – for each element of cost, a standard is identified through scientific estimation.
- Determination of actual cost incurred – The actual cost incurred for producing a product or rendering service is determined with reference to the various cost records.
- Variance analysis – Variance refers to the difference between the standard cost and the actual cost. Variance for each element of cost is determined. The variance in each element of cost is split on the basis of various reasons leading to the variance.
- Corrective action – Management will take necessary corrective action based on the reasons leading to both favourable and unfavourable variance.
- Cost Reduction – “Real and permanent reduction in the unit cost of goods manufactured or services rendered without impairing their suitability for the use intended or diminution in the quality of the product” – (ICMA London)
Advantages of cost Reduction
- Increased productivity
- Economic use of resources
- Permanent elimination of wastage
- Permanent reduction in cost
- Increased ROI (Return on Investment)
- Provide goods and services at a reduced price to customers
- Organisational planning and control – Cost accounting helps the management in the preparation of an effective organizational plan for the future and assist the management in regulating its operations. It is with the help of the cost accounting information the organisation structure of a company is finalized.
- Managerial decision making – cost accounting provides the required data for manager decisions. Cost Accounting techniques such as marginal costing, standard costing, budgeting content etc. are used for managerial decision making.
TYPES OF COST CENTRE
- Production cost centre: - a cost centre concerned with processing and production. Eg:- Welding shop, machine shop, assembling shop etc.
- Service cost centre: - which do not produce any product but provide service to the production cost centre. Eg – Water supply department in a factory, maintenance department, timekeeping department, personal department etc.
- Personal cost centre: - consist of persons or group of persons. Eg:- Works manager, Foreman, Storekeeper etc.
- Impersonal cost centre: - Equipment or location such as warehouse, machine etc.
- Process cost centre: consist of a specific process or a continuous sequence of operations. Eg:- In a readymade garments factory cutting stitching, assembling, packing are distinct process centres.
- Operation cost centre: - consist of machines and persons carrying out similar operations. Eg:- Welding machine, grinding machine, polishing machine.