Cost Sheet Paper

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Cost Accounting

Chapter Module-1 - Introduction to Cost Accounting

Definition

Cost: - Generally cost refers to all expenses incurred in producing a product or rendering service. But, from the cost accounting point of view “Cost is a normal sacrifice of resources in the creation of product or services”.

Costing: - Costing is defined as “the technique and process of ascertaining cost of a given thing”. According to CIMA it is defined as “the establishment of budgets, standard, costs and actual costs of operations, processes, activities or products and the analysis of variances, profitability or the social use of funds”.

Cost Accounting: - Cost accounting is defined as “the process of accounting for cost from the point at which expense is incurred or committed to the establishment of its ultimate relationship with cost centers and cost units. The institute of Cost and Works Accountant ICWA defines “Cost accounting is the technique and process of ascertainment of cost. Cost accounting is the process of accounting for cost, which, begins with recording of expenses or the basis on which they are calculated and end with preparation of statistical data.

Cost Accountancy: - Cost accountancy is used to describe the principles, conventions, techniques and systems which are employed in a business to plan and control the utilization of its resources. It is defined as “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. It includes the presentation of information derived there-from for the purpose of marginal decision making”.

Cost Centre: - Cost centre is defined as “a place or location or machine or person or thing for which cost can be ascertained”. It is the segment of activity or area of responsibility for which costs are accumulated”. Cost Unit: - Cost unit is defined as “a unit of a product or service or combination of them in relation to which costs are ascertained or expressed”.

Objectives of Cost Accounting: - The main objectives or purposes of Cost accounting are as follows:

1. Ascertainment of Cost: - It enables the Management to ascertain the cost of product, job, contract, services etc. The cost is calculated, by aggregating expenses subject to certain concepts and conventions.

2. Analysis of Cost: - Total cost is broken down into several constituent parts according to some basis for eg. Material labour expenses. The detail information about these parts helps to know the significance of each in the total cost.

3. Cost control: - The object is to minimize the cost of manufacturing, comparison of actual cost with standards, reveals the discrepancies, variances. If the variances are adverse the management enters into investigation so as to adopt corrective action immediately.

4. Reduction of cost: - Reduction of cost refers to the permanent reduction in the cost of a product or service without impairing the quality and without affecting the purpose for which it is intended to be used. Due to an instance competition in the market, the management has little scope to vary the sales price. In such situation, it becomes necessary to look into the activities that reduce the cost component.

5. Fixation of selling price: - Cost accounting provides cost information on the basis of which selling prices of products or services may be fixed. In periods of depression cost accounting guides in deciding the extent to which the selling prices will be reduced to meet the special situation.

6. Guide to business policy: - Cost accounting aims at serving the needs of management in conducting the business with more efficiency. Cost data provides guidelines for various managerial decisions, like make or buy, selling below cost, utilization of idle plant capacity, introduction of a new product etc.

Functions of Cost accounting

In order to pursue the objectives cost accounting is...
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