Cost Accounting

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To exercise effective control if stocks of raw materials, work-in-progress, consumable stores and finished goods in order to minimise the capital locked up in these stocks;.

Systems Design

To reveal sources of economy by installing and implementing a system of cost control for materials, labour and overheads;. To organise an effective information system so that different levels of management may get the required information at the right time in right form for carrying out their individual responsibilities in an efficient manner;. To guide management in the formulation and implementation of incentive bonus plans based on productivity and cost savings;. To supply useful data to management for taking various financial decisions such as introduction of new products, replacement of labour by machine etc.


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To help in supervising the working of punched card accounting or data processing through computers;. To organise cost reduction programmes with the help of different departmental managers;.

Use 'cost accounting' in a Sentence

To provide specialised services of cost audit in order to prevent the errors and frauds and to facilitate prompt and reliable information to management; and. To find out costing profit or loss by identifying with revenues the costs of those products or services by selling which the revenues have resulted. Broadly speaking, the above objectives can be re-grouped under the following three heads:. This objective is achieved through fixation of targets, ascertainment of actuals, comparison of actuals with targets, analysis of reasons of deviations between actuals and targets and reporting deviations to management for taking corrective action.

A number of objections are generally raised against the introduction of costing on various grounds. It has been argued that costing is of recent origin and that industries prospered in the past and are still prospering without the aid of costing and, therefore, expenditure incurred in installing a costing system would be an unnecessary expenditure. This argument overlooks the fact that modern industries are running under highly competitive conditions and that every manufacturer should know the actual cost of production to decide how far he can reduce the selling price.

Many industrial failure. It is argued that modern methods of costing are inapplicable to many types of industries. It is true that costing cannot be applied with advantage to trading concerns and concerns of small size. But in many cases some methods of costing can always be devised to suit the requirements of the business. It should be clearly understood that there is no stereotyped system of costing which can be applied to all types of industries.

The system of costing should be so devised as to suit the business but not the business to suit the system.


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  • It is argued that the adoption of costing system failed to produce the desired results in many cases and, therefore, the system is defective. The failure of a system may be due to several causes such as apathy or indifference of management, lack of adequate facilities, non-co-operation or opposition from the employees.

    So it is hasty to find fault with the system, if it fails to produce the desired results. It is argued that after some time, a costing system degenerates into a matter of forms and rulings. This is not the fault of the system. The latter utilize cost drivers to attach activity costs to outputs. The way these costs are assigned to cost objects are first decided in an activity analysis, where appropriate output measures are cost drivers.

    Accountants using activity-based costing will pass out a survey to employees who will then account for the amount of time they spend on different tasks. This gives management a better idea of where time and money is being spent.

    Most accounting practices for manufacturing work off the assumption that whatever is being produced is done in a large scale. Considered a simplified model of cost accounting, marginal costing sometimes called cost-volume-profit analysis is an analysis of the relationship between a product's or service's sales price, the volume of sales, the amount produced, expenses, costs, and profits.

    That specific relationship is called the contribution margin. The contribution margin is calculated by dividing revenue minus variable cost by revenue. This type of analysis can be used by management to gain insight into potential profits as impacted by changing costs, what types of sales prices to establish, and types of marketing campaigns.

    These are usually things like the payment on a building or a piece of equipment that is depreciating at a fixed monthly rate.

    Cost accounting - Wikipedia

    Variable costs are costs tied to a company's level of production. An example could be a coffee roaster which, after receiving a large order of beans from a far-away locale, has to pay a higher rate for both shipping, packaging, and processing. Operating costs are costs associated with the day-to-day operations of a business. These costs can be either fixed or variable depending on the unique situation. Direct costs are costs related to producing a product. If a coffee roaster spends five hours roasting coffee, the direct costs of the finished product include the labor hours of the roaster and the cost of the coffee beans.

    The energy cost to heat the roaster would be indirect because it is inexact and difficult to trace. Investopedia uses cookies to provide you with a great user experience. Operational costs can be transferred from the general ledger. You can automatically transfer the cost entries from the general ledger to cost entries with each posting. You can also use a batch job to transfer the general ledger entries to cost entries based on daily or monthly summary posting.

    What is True Cost Accounting?

    In cost journals, you can post cost and activities that do not come from the general ledger or are not generated by allocations. For example, you can post pure operational costs, internal charges, allocations, and corrective entries between cost types, cost centers, and cost objects individually or on a recurring basis. Allocations move costs and revenues between cost types, cost centers, and cost objects. Overhead costs are first posted to cost centers and later charged to cost objects.

    For example, this might be done in a sales department that sells several products at the same time. Direct costs can be directly allocated to a cost object, such as a material purchased for a specific product. The allocation base that is used and the accuracy of the allocation definition have an influence on the results of cost allocations. The allocation definition is used to allocate costs first from so-called pre-cost centers to main cost centers and then from cost centers to cost objects.

    Workflow in Cost Accounting

    Each allocation consists of an allocation source and one or more allocation targets. You can allocate actual values or budgeted values by using the static allocation method that is based on a definite value, such as square footage, or an established allocation ratio of You can also allocate actual values or budgeted values by using the dynamic allocation method with nine predefined allocation bases and 12 dynamic date ranges.

    You can create as many cost budgets as you want. You can copy the cost budget to the general ledger budget and vice versa. You can transfer budgeted costs as actual costs.

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