Costing / Cost Accounting• It is the process of accounting the total cost incurred in the processservice Costing may be defined as the system of accounts which systematically and accurately records every expenditure in order to determine the cost of a product after knowing the different expenses incurred in various departments.
Budgeting• It is Financial Quantitative statement prepared in prior to the definite period of time• It is prepared based on the previous data available
Need of Budgeting• To Determine, classify, analysis the cost• Determine the price• Managerial decisions• Expansion and contraction• Continuation of business . Etc.
Cost Components Direct material cost Direct labour cost Direct expenses Prime cost Factory over heads Factory costs Administration over heads Cost of production Selling & distribution over heads Components of total costDirect material Prime cost or direct cost orDirect labor Total cost or cost of sales Profit first costDirect expenses Works or factory cost orPrime cost plus works overheads production cost or Selling price manufacturing costWorks cost plus office and Office cost or total cost ofadministration overheads productionOffice cost plus selling and Cost of sales or total costdistribution overheads
Cost Components Profit Selling and distribution overheads Administrative overheadsCOST Factory overheads Direct expenses Direct labour Direct material Prime cost Total cost
Objectives of Cost Accounting or Costing1. Determining Selling Price2. Determining and Controlling Efficiency3. Facilitating Preparation of Financial and Other Statements4. Providing Basis for Operating Policy
1. Determining Selling Price Selling Price = Total Cost + Profit•. Business enterprises run on a profit-making basis. It is, thus, necessary that revenue should be greater than expenditure incurred in producing goods and services from which the revenue is to be derived.•. Cost accounting provides various information regarding the cost to make and sell such products or services.
2. 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.
3. Facilitating Preparation of Financialand Other Statements• 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 materials, work-in-progress and finished goods. This helps in speedy preparation of financial statements.
4. Providing Basis for Operating Policy• Cost accounting helps management to formulate operating policies.• These policies may relate to any of the following matters: – Determination of a cost-volume-profit relationship – Shutting down or operating at a loss – Making for or buying from outside suppliers – Continuing with the existing plant and machinery or replacing them by improved and economic ones
Methods of Costing The principles in every method of costing are same but the methods ofanalyzing and presenting the costs differ with the nature of business.1. Job Costing2. Contract Costing3. Cost Plus Costing4. Batch Costing5. Process Costing6. Operation Costing7. Unit Costing (Output Costing or Single Costing)8. Operating Costing9. Departmental Costing10. Multiple Costing (Composite Costing)
Techniques of Costing• Besides the above methods of costing, following are the types of costing techniques which are used by management only for controlling costs and making some important managerial decisions.• As a matter of fact, they are not independent methods of cost finding such as job or process costing but are basically costing techniques which can be used as an advantage with any of the methods discussed above.1. Marginal Costing2. Direct Costing3. Absorption or Full Costing4. Uniform Costing
Marginal costing• Marginal costing is a technique of costing in which allocation of expenditure to production is restricted to those expenses which arise as a result of production,e.g., materials, labor, direct expenses and variable overheads.Fixed overheads are excluded in cases where production varies because it maygive misleading results.The technique is useful in manufacturing industries with varying levels ofoutput.• Marginal cost is the very cost incurred by one additional unit of production.
Direct costing• The practice of charging all direct costs to operations, processes or products and leaving all indirect costs to be written off against profits in the period in which they arise is termed as direct costing.• The technique differs from marginal costing because some fixed costs can be considered as direct costs in appropriate circumstances.
Absorption costing• The practice of charging all costs both variable and fixed to operations, products or processes is termed as absorption costing.
Uniform costing• A technique where standardized principles and methods of cost accounting are employed by a number of different companies and firms is termed as uniform costing.• Standardization may extend to the methods of costing, accounting classification including codes, methods of defining costs and charging depreciation, methods of allocating or apportioning overheads to cost centers or cost units.• The system, thus, facilitates inter- firm comparisons, establishment of realistic pricing policies, etc.