Cost Accounting Notes.docx
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Cost Accounting Notes.docx
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CostAccountingNotes
Question1
SVLtd.Isamanufacturingcompanywhichhasasoundsystemoffinancialaccounting.Themanagementofthecompanythereforefeelsthatthereisnoneedfortheinstallationofacostaccountingsystem.Prepareareporttothemanagementbringingoutthedistinctionbetweencostandfinancialaccountingsystemandtheneedfortheintroductionofasoundcostaccountingsystem.
Answer
TheManagingDirector,
S.V.Ltd.
NewDelhi
Subject:
EstablishmentofaCostAccountingSystem
Sir,
Duringthecourseofourdiscussionwithyoulastmonth,youmentionedthatyourcompanydidnotrequireacostaccountingsystemasithadasoundfinancialaccountingsystem.Afterourdiscussionwithyou,wehadanopportunitytostudytheproducts,processesofmanufacture,organizationandsellinganddistributionmethodsofyourcompany-whichisamanufacturingcompany.Wehavecometotheconclusionthatyourcompanycertainlyrequiresacostaccountingsystem.Tostrengthenfurtherourview-point,wegiveourreportbybringingthedistinctionsbetweenthetwosystemsasbelow:
Thefinancialaccountingsystemofacompanymainlyservesasausefulsourceofinformationtoowner/shareholders/creditorsandfortaxpurposes.Itdoesnotprovideadequatehelptotheexecutivesworkingintheorganization.Theinformationprovidedbythefinancialaccountingsystemservesnousefulpurposefromtheview-pointofplanning,controlanddecisionmaking.Theabsenceofrequiredinformationrendersplanning,controlanddecisionmakingextremelydifficult.Ontheotherhand,costaccountingsystemwasevolvedasasupplementaryaccountingmethodmainlytoservetheneedsofmanagement.Costaccountingsystemcanprovideataregularinterval,theneededinformationtotheconcernedexecutivestoperformthefunctionsofplanning,controlanddecisionmaking.
Thefinancialaccountingsystemshowsthetradingresultsofthecompanyasawhole;itdoesnotanswerthequestionwhythereisanincreaseoradecreaseinprofitorloss.Theprincipleofmatchingcostswithrevenuesunderacostingsystemnotonlyindicatestheprofitorlossofeachproduct,butwouldalsoshowthecorrectvalueofclosinginventory.Thuscostingsystemhelpsfinancialaccountingsystemtoo.Underfinancialaccountingsystemthefinancialstatementsarepreparedonlyatthecloseoftheaccountingperiod.Suchstatementsdonotprovideday-to-daycostinformationforevaluatingtheefficiencyoftheconcern.Butcostaccountingsystemcansupplyeverypossiblecostinformationtomanagementformanagerialcontrol.Undercostaccountingsystembyusingstandardcostingthevariancesbetweenpredeterminedandactualcostscanbedetermined.Thesevariationsandtheircausesspeaksabouttheconcern’soperatingefficiencyandinefficiency.
Infinancialaccountingsystemnoattemptisgenerallymadetorecorddatabyjobs,processes,products,departmentsetc.Itonlyprovidesinformationintermsofincome,expenses,assetsandliabilitiesforthecompanyasawhole.Thustheavailableinformationisnotveryusefulfortheascertainmentofprice,controlofcosts,ascertainmentofproductprofitabilityetc.Costaccountingsystemrecordsdatainthemannerthathelpstheascertainmentofpriceandprofitabilityandalsothecontrolofcostsbyusingvariances.
Governmentinitseffortstoprotectconsumers,oftenresortstostatutorypricecontrol.Costaccountingsystemcanhelpbyprovidingenoughcostinformationwhichcouldbeutilizedtopressuponthegovernmenttoconvinceforpriceandtoarriveatasuitablepricebeforetheirarbitraryfixationofit.
Itisapparentfromtheabovediscussionthatdetailedandanalyticalinformationcannotbehadfromexistingfinancialaccountingsystem.Wethereforestronglyrecommendtheneedfortheintroductionofasoundcostaccountingsysteminyourconcern.
Yoursfaithfully,
X.Y.&Co.
CharteredAccountants.
Question2
Definetheterms‘costcentre’and‘costunit’.
(a)CostCentre
Thetermcostcentreisdefinedasalocation,person,oranitemofequipmentoragroupoftheseforwhichcostsmaybeascertainedandusedforthepurposesofcostcontrol.Costcentrescanbepersonalcostcenters,impersonalcostcenters,operationcostcenters,andprocesscostcenters.
CostUnit
Thetermcostunitisdefinedasaunitofquantityofproduct,serviceortime(oracombinationofthese)inrelationtowhichcostsmaybeascertainedorexpressed.Itcanbeforajob,batch,orproductgroup.
(b)
Industry
Methodofcosting
Unitofcost
(i)NursingHome
Operating
PerBedperweekorperday
(ii)Roadtransport
Operating
PerTonneKilometerorpermile
(iii)Steel
Process
PerTonne
(iv)Coal
Single
Perunit
(v)Bicycles
Multiple
Eachunit
(vi)Bridgeconstruction
Contract
Eachcontract
(vii)InteriorDecoration
Job
EachJ
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