1. COST ACCOUNTING
UNIT – V
1. Cost center :definition – classification
2. Profit center :meaning – purpose – profit center vs. cost center
3. Cost unit : meaning and example
4. Cost control : meaning –elements –cost control techniques
5. Cost reduction : meaning feature – features – field covered- merits- tools and techniques
6. Cost vs. cost reductions
2. 1. COST CENTRE
1. Meaning - cost center:
Cost center means a smaller divisions of various functional departments in a large
business organization for cost ascertainment of control. It is sub division of the
organization to which cost center.
A cost center is a location, person or item of equipment’s (group of these) for which
cost any may be ascertain and use for the purpose of cost control, the manager of the cost
center is responsible of control of the cost center.
Example:
1. A location- a works department, store yard etc.
2. A person – a supervisor, sales man etc. . . .
3. An item of equipment – a machinery, a delivery man etc.
2. Definition of cost center:
CIMA defines cost center as “a production or service function and activity or item of
equipment whose cost may be attributed to cost units. A cost center is the smallest organization
is sub-unit which separate cost allocations is attempted”.
3. Features of cost center
A cost center is the location person or item of equipment (group these) for the which cost
may be ascertain a used for the purpose of cost control. It has following futures.
1. It is used to ascertain the cost and control
2. It is a sub division of the functional department
3. A number and size of the cost center is very form organization to organization
4. The manager is responsible for the every custom center
5. It is identifiable with and organizations
4. Factors of cost center
The selection and installation of a suitable cost center is depends on the following factors
1. To the nature and size of the business
2. To the layout and organization of the factory
3. To the availability of the various cost and data information
4. To the management policy regarding cost ascertainment and control
5. The government regulation and policy
5. Classification of cost center:
To the cost center classified in the following controlee.
3. 1. Personal cost center: A cost center which consists of a person or group of persons in
called personal center.
2. Impersonal cost center: A cost center consist of the locations for the item of equipment,
production department, a machine are the groups of machine is called impersonal cost
center.
3. Production cost center: A cost center which is engage in production activity and
conversion of raw material in to finished production.
4. Service cost center: A cost center which are manically to and render service to production
and service department is called service cost entries.
5. Process cost center: A cost center in which specific process are or a continuous sequence
of operations carried out is called process cost center.
2. PROFIT CENTRE
1. Profit center – Meaning
A profit center is a responsibility center which accumulates both cost and revenue. It is sub
unit of an organization it is division of the company which produce and makers’ the producers
may be called ‘profit center’. The performance of profit center is evulacatud in terms of the fact
whether the center has achieved is the budgeted profit.
2. Profit center – Definition
CIMA define profit catered as, a segment the business entity by which both revenue are
received and expenses are incurred or controlled.
3. Objectives of profit center
Following the main purpose of a profit center:
1. To achieve the target of profit
2. To controlee over the both cost and revenue
3. To assign the responsibility for each center
4. To evulacatud the performance result
5. To ascertain to cost for each segment
3. DISTINGUISH BETWEEN COST CENTER AND PROFIT CENTER
S.no Cost center Profit center
1 It is allocation are place or person an
equipment for which cost may be
ascertained
A profit centers sub-unit of an
organization to which both revenue and
cost assigned
2 Separate cost allocation is attempted Revenue and cost are cumulatively
assigned
4. 3 It is an individual activity are group of
similar activates for which cost are
accumulated.
It is segmental activity
4 It is measured with control It is to evaluate segmental performance
5 It is classified as personal, impersonal,
production, service and press cost centers
It is classifies as revenue and cost center
6 It is small segment It is large segment
7 It is created by cost accounts It is created by top management
8 It has no authority in decision making It has an authority and decision making
3. COST UNIT
1. Cost unit –Meaning
A cost unit of product or unit of service to which cost are ascertained by means of allocation
by apportionment and absorption. Cost unit can be anything for which it is possible to purpose of
cost. The cost unit selected in each satiation in depend on the number of factors including the
purpose of cost ascertainment exercise and amount information available.
Examples of cost unit
s. no Industry/product/activity Cost unit
1 Brick making 1000 bricks
2 Automobile Automobile unit produceautd
3 Cement Tone of cement
4 Coal Tone of coal
5 Electricity Kilowatt –hour (kwh)
6 Professional service Chargeable hour
7 Education Enrolled student
8 Spinning Kg of yarn spun
9 Textiles Meter of cloth produced
10 Oil referring Per ton
11 Passenger transport Passenger –kilometers
12 Cargo transport Tonne-kolometters
13 Toy making Batch of toys
14 Ship building Per ship
15 Gas Cubic feet or coble meter
16 Mines Tone of material extracted
17 Hospital Patient day
18 Sugar Tons of sugar produced
19 Credit control Account maintained
20 Selling Consumer rate
It I are service organization a composite cost units is used such tone-kilometer, kilowatt-hour,
patient day etc.
5. 4. COST CONTROLE
1. Cost control- Meaning
Cost controlee is a process which focus on controlling the total cost thought comparative
analysis. It is practice which work to maintain the actual cost in the accordance with the
established norms. It is ensure the cost included on operation should not beyond the pre-deter
main cost. Cost controlee is a technique which provide the necessary information the
management that actual costs are activated with the budget cost or not.
2. Cost control – Definition
CIMA define cost control as “the regulation by exculitive action of the cost of operation
undertaking particularly where such as action is guided by cost accounting”
The following are the major steps of a cost control scheme
1. Set down a norm or standard target
2. Select a yard stick for the measuring the standard target
3. Cost control elements
4. Ascertain the actual performance to the applying the yardstick
5. Analysis the variance by case find fix responsibility for variances
6. Take the correct action eliminate the casus of various
7. Perioadatically review a standard or target and revise them in the light of changed
circumstances
3. Cost control techniques
The following the important cost control techniques
A. Material control
B. Labor control
C. Overhead control
D. Budget control
E. Standard costing
F. Control of capital expenditure
G. Productivity and Accounting rations.
4. Advantages of cost control
The following the advantages of cost control
1. It helps to reduce inefficient and wages
2. It helps to establish a predetermined and standard costing
3. It helps to periodically review the standards
4. It helps to take correct actions
6. 5. It helps to identify variances in costing in and to fix responsibility.
5. COST REDUCTION
1. Cost reduction- Definition
The cost reduction it is a process and aims at cowering the unit cost of product manufacturing
or service rendered without the affecting quality by using new and improve methods and
techniques.
It is ascertain substitute ways to reduce a cost of the unit it ensures saving in per unit cost and
maximization of profit of the organizations.
To identify cost reduction in the following are the major elements.
Saving in per unit cost
No compromise what the quality of the quality of product
Saving are non-volatile in nature.
Tools of cost reduction are quality operation and research, improvement in product design, join
evaluation and merit rating variety reduction etc.
2. Cost reduction- Definition
CIMA defends cost reduction as “it is to be understood as the achievement of real ad
permanent reduction in the unit cost goods manufacturing or services end read without impairing
the suitability for use intended.
3. Characters of cost reduction
The following are the characters of cost reduction
1. It must be real one in the course of manufacture or services rendered
2. It is a permanent one &continuous process
3. It helps to reduce the cost price
4. It should limited the wasteful elements
5. It well ensuring the minimum possible costs
6. It is a corrective function.
4. Advantages of cost reduction
The following are the advantages of cost reduction
1. It helps to improve the management efficiently
2. It helps to increase the profit and return shareholders
3. It helps to reduce the selling price at available cheapest
7. 4. It helps to increase the revenue to the government by way of taxation
5. It increase the productivity.
6. Improve the quality of the product
7. It enhance to use the resources efficiency
8. It helps to expands to business volume
9. It development the economic growth in GDP
10. It assist to a continues process.
5.Disadvantage of cost reduction
1. It well lead to scientific the quality of product
2. It will lost the market for the product
3. It fails to co operation and active participation of employees towards cost reduction
programme.
4. It not applicable for real and permanent changes
5. It is conflict orgnizactional objectives.
6.Distinnugidh between cost reduction and cost control
s. no Cost control Cost reduction
1 It aims achiving to predetermained costs It aim at reduction of cost per unit
2 It iess dynamic approach to cost
improvement
It is more dynamic approach to cost
improvement
3 Is routin exercise It is a permanent Exercise
4 It is concern with pre determai stands It is not concern with predetermained
standards
5 It is adhearance to cost standards It is challenge to cost stands
6 It is a preventive function It is a continuous function
7 It focus on total cost It function on per unit cost
8 Is does not guarantee quality and
maintained
100% quality maintained is assured
6. Areas of cost reduction
Cost reduction method may be applied in the following areas of fields
1. Product design
Under product design, cost reduction is possible in a permanent nature. Introduction of a new
design or change in the existing design may be impact to cost reduction. Standardization and
simplification of product design should also effect the cost reduction.
2. Production methods
Adoption new method of production may result cost reduction.
3. Factory layout
8. A study of factory layout to deter main the elevation of wastage of time, un necessary effort
and loss of money due to useless movement to travel work in process to cost reduction.
4. Administration
Administrative factor also leads to cost reduction cost control UN necessary use stationery,
phoebe, entertainment expense, travelling, will scope for cost reduction by top management.
5. Marketing
There is scope for reduction in marketing cost as such as research, advertisement, packing,
warehouse, distribution, after sales service etc. will lead to reduction by controlling the cost on
marketing.
6. Finance
Under cost reduction programmer, the top management shouldnevulacare the finance
management. Under this factor, cost lead to producing finance, useless investments, and act can
be revaluated to reduce the financial cost.
7. Tools and techniques of cost reduction
The various techniques and tools used for achieving cost reduction are practically to the same
a for cost control. The following are some of them are
a. Budgetary control
b. Standard costing
c. Standardization of product
d. Simplification on verity reduction
e. Improvement in design
f. Material control
g. Labor control
h. Production planning and control
i. Automation
j. Operation research
k. Market research
l. Overhead control
m. Planning and control of finance
n. Value analysis
o. Quality measurement and research
p. Cost benefit analysis
6. COST AUDIT
Cost audit
9. The term ‘audit’ mean examination of books of account and vouchers as to establish their
accuracy.
1. Defenition of Cost Audit
According to CIMA “the verification of account and check on the adherence to the cost
accounting plan” It is preventive measure, a guide for management policy and decision in
addition to being a barometer of performance.
2. The main function of cost audit
1. The verify that the cost accounts are correctly kept in accordance with the principal of
controlling
2. To seizure of cost accounting it is properly carried out
3. To direct error and prevent fraud and possible misappropriation
4. To check accuracy of accounting information’s
5, to prepare the cost report for the decision making by top management
3. Types of cost audit
The following are the main types of cost audit
1. Cost audit to assist management
The main objective of this type of cost audit is to make available accurate relevant and
prompt information to management to decision management.
2. Cost audit on behalf of the government
The government may appoint a cost audit to conduct in a following circumstances
1. To conduct n/s 233 –B of the companies act,1956
2. To ascertain in the correct cost of certain units
3. To ascertain the correct cost of a contact under ‘cost plus’ basics
4. To fix reasonable price to certain items the to prevent undue profiteering
3. Cost audit on behalf a customer
Cost audit is conducted some times on behalf a customer when he agrees to pay for a certain
product on ‘cost plus’
4. Cost audit on behalf the trade association
A trade associated man appoint cost auditor to conduct the cost audit
1. To ascertain comparative profit ability of its members
2. To deter main the minimum price
10. 3. To maintain minimum price to prevent undue profiteering
5. Cost audit on behalf of the association
A cost audit may be conduct to settle trade disputes for more wages , bonous,share in profit ,
etc.
6.Objetives of cost audit
The board objective of cost audit are as follows
1. To detect the errors in cost records
2. To check the accuracy of cost accounts
3. To ensure the adoptability of accounting standards
4. The advice the management for decision making
5. To measure the existing system
6. To measure the optimum result
7. To calculate the return on capital employed.
7.Advantages of cost audit
The following the main advantage of cost audit
1. It helps to maintain thr accuracy of accounts
2. It helps to prevention of errors and funds
3. It helps to management to decision making
4. It bring more reliability in a cost data
5. It heps to fix managent by expanction to identify th efficient and inefficient sources
6. It assist the final audit
7. It increase the moral influanece on the employes
8. It help to fix the selling price
9. It help identify the unit to take correction action
10. It helps to improve efficiency of exixting system of operation
8 Limitation of cost audit
The following of limitation of cost audit
1. It is useful for internal purpose only
2. It is not flexible of practical approach
3. It does not full fill the scope management in a full manner
4. It does not compile with final audit
5. It consult and need more resources to establish
6. Is does not provide sufficient information to take important decisions
7. It need more knowledge and expect skill.
9. Distinuish between cost audit and financial audit
S. no Cost audit Financial audit
11. 1 It covers cost accounts It covers financial accounts
2 It impart a forward approach for
future
It imparts with historical nature
3 It is concern with the accuracy of
each job, process , unit and etc.
It concern withaccurancy of profit and loss,
balance sheet
4 It report the management of the
company
It report to shareholders of the company
5 It treatment of certain of cost factor
or differ from final audit
It treatment of certain financial factors are
differ from cost audit
6 It comments are not published It comments are parts of published accounts
7 It an efficiency and proprietor audit It is on true and fair view of the state affairs
8 This may be due to voluntary or
statuary requirement.
It is an outcome of statutory equipment’s
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N.HARIHARAN
2 BCOM CS
