What is cost accounting system of foresight and not a postmortem examinationIt turns losses into profits speed up activities and eliminates waste?

PART I

COST ACCOUNTING

Section A

INTRODUCTION

NATURE AND SCOPE OF COST ACCOUNTING

INTRODUCTION

In the modern business world, the nature and functioning ofbusiness organisations have

become very complicated. They have to serve the needs of varietyof parties who are interested

in the functioning of the business. These parties constitute theowners, creditors, employees,

government agencies, tax authorities, prospective investors, andlast but not the least the

management of the business. The business has to serve the needsof these different category

of people by way of supplying various information from time totime. In order to satisfy the

needs of all these group of people a sound organisation ofaccounting system is very essential.

In the ancient days the information required by those who wereinterested with a business

organisation was met by practising a system of accounting knownas financial accounting

system. Financial accounting is mainly concerned withpreparation of two important

statements, viz., income statement (or profit & lossaccount) and positional statement (or

Balance Sheet). This information served the needs of all thosewho are not directly associated

with management of business. Thus financial accounts areconcerned with external reporting

as it provides information to external authorities. Butmanagement of every business

organisation is interested to know much more than the usualinformation supplied to outsiders.

In order to carry out its functions of planning, decision-makingand control, it requires

additional cost data. The financial accounts to some extentfails to provide required cost

data to management and hence a new system of accounting whichcould provide internal

report to management was conceived of.

NEED FOR COST ACCOUNTING

The need for cost accounting arises owing to the following :

To Overcome the Limitations of Financial Accounts

Financial accounting records in an overall manner the results ofthe operations of a

business, using conventional double entry book-keepingtechniques. It suffers from the

following limitations :

(i) It provides only past data : Financial accounts provide outof date information

to management. But management is interested in current data butnot past data

as it does not serve any purpose to it. Therefore it has beenrightly pointed out

that financial accounts provide only a post-mortem analysis ofpast activities.

(ii) It reveals only over all result of the business : Financialaccounts does not

provide data for each and every product, process, department oroperation

separately. Instead it provides the financial information in asummary form for

the entire organisation as a whole.

(iii) It is static in nature : Modern business is dynamic butnot static. Financial

accounts does not incorporate the changes that take place withinthe business.

(iv) It fails to take into account the impact of price levelchange : In the modern

4 Cost Accounting and Financial Management

inflationary conditions the price level has significant impactover financial

statement. Under financial accounts, assets are shown at theactual or historical

cost. Consequently depreciation is also charged on actual orhistorical cost. This

under charging of depreciation will distort the profitfigure.

(v) Possibility of manipulation of financial accounts : Veryoften financial accounts

are manipulated at the whims and fancies of management so as toproject better

image in the minds of prospective investors. The chief forms ofmanipulating

the financial accounts assume the form of over or undervaluationof inventory,

excessive or inadequate provision for depreciation, creation ofsecret reserves,

etc.

(vi) It fails to exercise control over resources : Financialaccounts fail to exercise

control over materials, labour and other expenses incurred in abusiness enterprise.

As a results, avoidable wastages and losses go unchecked underthis system of

accounts.

(vii) It fails to provide adequate data for price fixation :Financial accounts fail to

provide adequate cost data on the basis of which selling priceis fixed. In the

absence of fixation of prices in advance, it is not possible tosupply quotations to

the prospective customers. To that extent the income from suchsales diminish.

(viii) It fails to provide adequate data for management incarrying out its functions :

Management of every organisation relies heavily on adequate costdata for

formulating policies and in decision-making process. Butfinancial accounts

fails to provide such useful cost data to management.

(ix) It does not provide a basis for cost comparison : Financialaccounts does not

help in cost comparison over a period of time or between twojobs or two

operations. Thus a basis for judging the efficiency of an yearwith past year or

worthfulness of two different jobs or operations cannot beappraised.

(x) It does not make use of control techniques : Financialaccounts fail to make use

of certain important cost control techniques such as budgetarycontrol and standard

costing. Thus financial accounts do not facilitate measuring theefficiency of the

business with the help of control techniques.

(xi) It fails to ascertain break-even point : Financialaccounting does not help in

ascertaining the break-even point, i.e., the sale or outputwhere the revenue

equals the cost. Hence, the point of no-profit-no-loss cannot bemade out under

financial accounts.

To Ensure Optimum Utilisation of Resources

In todays business world, the resources available are veryscarce. Hence every business

unit must strive hard to obtain maximum output with theavailable input. In order to ensure

the optimum utilisation of scarce resources, the value of inputis measured against the value

of output. This implies matching cost per unit of productionagainst the value of output or

selling price. But financial accounts does not provide theinformation relating to cost per

unit of production. Hence the need for cost accounting was feltnecessary.

To Achieve Overall Efficiency of Business

Every businessman will make constant effort to improve hisbusiness. In order to

formulate suitable policy and sound decision, he has to knowanswers to certain questions

such as (a) What is the maximum profit which a business canmake? (b) Is the profit earned

by it is more or less compared to the earlier years? (c) Whichproduct line is making more

profit? (d) Has too much capital is blocked in raw materials?(e) Whether the cost of

production has gone up compared to earlier years? (f) Should theselling price requires

revision? Cost accounting serves as an useful tool in the handsof management in this

direction. By analysing the cost of production of every unit, ithelps management to know

the answers to the above questions.

GROWTH AND DEVELOPMENT OF COST ACCOUNTING

The history of cost accounting can be traced back to thefourteenth century. In the course of

its evolution it passed through following stages.

(1) In the first stage of its development, cost accounting wasconcerned only with

the three prime cost elements, viz., direct material cost,direct labour cost and

direct expenses. For recording the transactions relating tomaterials the important

documents used were (a) stores ledger, (b) a materialrequisition note, and (c)

materials received note. To account for labour cost, employeetime card and

labour cost card were devised by Mr. Metcalfe. Later on adistinction between

manufacturing and non-manufacturing cost was made by Mr. Norton.Thus

material cost, labour cost and manufacturing cost constitutedprime cost.

(2) Secondly, around the turn of the nineteenth century, theimportance of nonmanufacturing

cost (overheads) was recognised as one of the distinct elementof

cost. The method of charging non-manufacturing cost to theproduction cost was

devised under this stage.

(3) Thirdly, the techniques of estimation and standards aredevised. Instead of using

actual cost, standard costs are used and by comparing with theactual cost the

differences are noted, analysed and disposed off accordingly.This helps in

knowing the efficiency of the business undertaking.

(4) Fourthly, cost accounting methods were applied to all typesof business

undertakings. The costing principles and techniques were alsoextended to

important functions of a business.

(5) In modern times the development of electronic dataprocessing has occupied

significant stage in the growth of cost accounting system.

Cost Accounting in Indian Context

The application of cost accounting methods in Indian industrieswas felt from the

beginning of the twentieth century. The following factors haveaccelerated the system of

cost accounting in our country.

(a) Increased awareness of cost consciousness by Indianindustrialists with a view

to ascertain costs more accurately for each product or job.

(b) Growing competition among manufacturers led to fixation ofprices at a lower

level so as to attract more customers.

a view to achieve the targets led to cost reduction programmesby Indian

industrialists.

(d) Increased government control over pricing led the Indianmanufacturers to give

utmost importance to the installation of cost accounts.

(e) The establishment of National Productivity Council in 1958and the Statutory

Nature and Scope of Cost Accounting

6 Cost Accounting and Financial Management

Recognition of Institute of Cost and Works Accountants of Indiain 1959 gave

further encouragement to install cost accounting system inIndian industries.

DEFINITION AND SCOPE OR COST ACCOUNTANCY

The terminology of cost accountancy published by the Instituteof Cost and Management

Accountants, London defines cost accountancy as "the applicationof costing and cost

accounting principles, methods and techniques to the science,art and practice of cost control

and the ascertainment of profitability. It includes thepresentation of information derived

therefrom for the managerial decision-making."

On analysis of the above definition, the following features ofcost accountancy become

evident :

(a) "Cost accountancy" is used in the broadest sense whencompared to "cost

accounting" and "costing". This is so because cost accountancyis concerned

with the formulation of principles, methods and techniques to beapplied for

ascertaining cost and profit.

(b) Having ascertained 'cost' and 'profit', cost accountancy isconcerned with

presentation of information to management. To enable managementto carry out

its functions, reports must be promptly made available at theright time, to the

right person and in a proper from.

such as introducing a new line of product, replacement of manuallabour

by machines, make or buy, decisions, etc.

SCOPE OF COST ACCOUNTANCY

The scope of any subject refers to the various areas of studyincluded in that subject. As

regards the scope of cost accountancy is concerned, it has vastscope. The following topics

fall under the purview of cost accountancy : (1) Costing, (2)Cost Accounting, (3) Cost

Control Techniques, (4) Budgeting and (5) Cost Audit.

1. Costing

The terminology of ICMA, London, defines costing as "thetechnique and process of

ascertaining the cost."

The above definition is very significant in as much as itcarries the main theme of cost

accountancy. This definition emphasises two important aspects,viz.

(a) The technique and process of costing : The technique ofcosting involves two

distinct steps, namely, (i) collection and classification ofcosts according to

various elements and (ii) allocation and apportionment of theexpenses which

cannot be directly charged to production. As a process, costingis concerned

with the routine ascertainment of cost with a formalprocedure.

(b) Ascertainment of cost : It involves three steps, viz., (i)collection and analysis of

expenses, (ii) measurement of production at different stages and(iii) linking up

of production with the expenses. To achieve the first step,costing has developed

different systems such as Historical, Estimated and StandardCost. For achieving

the second step, costing has developed different methods such assingle or

output costing. Job costing, contract costing, etc. Finally, forachieving the last

step costing has developed important techniques such asAbsorption Costing,

Marginal Costing and Standard Costing.

The three terms indicated as 'systems', 'methods', 'techniques'are independent factors

but co-exist together. Ascertainment of cost of production isbased on all these three terms.

For example, continuous type of industries may use processcosting as a method, using

actual cost as a system, under Standard Costing Technique.

2. Cost Accounting

Kohler in his dictionary for Accountants defines cost accountingas "that branch of

accounting dealing with the classification, recording,allocation, summarisation and reporting

of current and prospective costs."

Mr. Wheldon defines cost accounting as "the classifying,recording and appropriate

allocation of expenditure for the determination of the costs ofproducts or services, the

relation of these costs to sales values, and the ascertainmentof profitability."

The above definitions reveal the following aspects of costaccounting :

(a) Cost classification : This refers to grouping of like itemsof cost into a common

group.

(b) Cost recording : This refers to posting of cost transactionsinto the various

ledger maintained under cost accounting system.

departments.

(d) Cost determination or cost finding : This refers to thedetermination of the cost

of goods or services by informal procedure, i.e., proceduresthat do not carry on

the regular process of cost accounting on a continuousbasis.

(e) Cost reporting : This refers to furnishing of cost data on aregular basis so as to

meet the requirements of management.

Differences between Cost Accountancy, Costing and CostAccounting

Points of Cost Accountancy Costing Cost Accounting

Differences

(1) Scope Cost accountancy is broadest It is broader in It isnarrow in its scope.

in its scope. its scope.

(2) Function It is concerned with formulation It is concernedwith It is concerned with

of costing principles, methods, ascertainment of cost. recordingof cost.

techniques to be adopted by

a business.

(3) Periodicity of It is a starting Point. It begins where costIt begins where costing

functioning accountancy ends. ends.

(4) Persons The persons involved are The person involved is Thepersons involved

involved experts in the field of cost accountant. are costclerks.

cost accountancy such as

management accountant.

3. Cost Control

According to Kohler, cost control represents the employment ofmanagement devices

in the performance of any necessary operation so thatpre-established objectives of quality,

quantity and time may be attained at the lowest possible outlayfor goods and services. The

terminology published by ICMA, London, defines cost control as"The guidance and

Nature and Scope of Cost Accounting

8 Cost Accounting and Financial Management

regulation by executive action of the cost of operating anundertaking." Acccording to this

definition, cost control aims at guiding the actuals towards thelines of target and regulates

the actuals if they deviate from the targets. This guidance andregulation is done by the

executive who is responsible for causing the deviation. Thisprocess will become clear by

enumerating the steps involved in any cost controltechnique.

(a) Fixation of targets in terms of cost and productionperformance.

(b) Ascertaining the actual cost and production performance.

(d) Analysing the variance by causes and the person responsiblefor it.

(e) Taking remedial steps to set right unfavourablevariations.

Cost control is exercised through a variety of techniques suchas inventory control,

quality control, budgetary control, standard costing, etc. Theadvantages of cost control are

as follows :

(a) It helps in utilising the resources to the full extent.

(b) It helps in reduction of prices which are benefited bycustomers.

(d) It increases the profit earning capacity of thebusiness.

(e) It increases the goodwill of the business.

4. Budgeting

Mr. Heiser in his book Budgeting-Principles and Practice,defines budget as "an overall

blue print of a comprehensive plan of operations and actionsexpressed in financial terms.

According to him hudgeting process involves the preparation of abudget and its fullest use

not only as a devise for planning and co-ordinating but also forcontrol."

5. Cost Audit

The terminology of ICMA, London, defines cost audit, as "theverification of the

correctness of cost accounts and of the adherence to the costaccounting plan.

NATURE OF COST ACCOUNTING

The nature of cost accounting can be brought out under thefollowing headings :

1. Cost accounting is a branch of knowledge : Though consideredas a branch of

financial accounts, cost accounting is one of the importantbranch of knowledge, i.e., a

discipline by itself. It is an organised body of knowledgeconsisting of its own principles,

concepts and conventions. These principles and rules of coursevary from industry to industry.

2. Cost accounting is a science : Cost accounting is a scienceas it is a body of systematic

knowledge relating to not only cost accounting but relating to awide variety of subjects

such as law, office practice and procedure, data processing,production and material control,

etc. It is necessary for a cost accountant to have intimateknowledge of all these field of

study in order to carry on his day-to-day activities. But it isto be admitted that it is not a

perfect science as in the case of natural science.

3. Cost accounting is an art : Cost accounting is an art in thesense it requires the

ability and skill on the part of cost accountant in applying theprinciples, methods and

techniques of cost accountancy to various management problems.These problems include

the ascertainment of cost, control of costs, ascertainment ofprofitability, etc.

4. Cost accounting is a profession : In recent years costaccounting has become one of

the important professions which has become more challenging.This view is evident from

two facts. First, the setting up of various professional bodiessuch as National Association

of Accountants (NAA) in USA. The Institute of Cost andManagement Accountants in UK,

the Institute of Cost and Works Accountants in India and suchother professional bodies

both in developed and developing countries have increased thegrowing awareness of costing

profession among the people. Secondly, a large number ofstudents have enrolled in these

institutes to obtain costing degrees and memberships for earningtheir livelihood.

RELATIONSHIP BETWEEN FINANCIAL ACCOUNTING

AND COST ACCOUNTING

Cost accounting is very closely-related to financial accounting.Some authorities on the

subject consider cost accounting to be the branch of financialaccounting. But it may be

said that cost accounts is complementary to financial accounts,i.e., a subject which is

necessary to make financial accounts whole or complete.Financial accounts and cost accounts

are both similar in certain respects. But in some other respectsthey differ from one another.

These points of similarities and dissimilarities and enumeratedbelow :

Points of Similarities

(a) The fundamental principles of double entry is applicable inboth the systems of

accounts.

(b) The invoices and vouchers constitute the common basis forrecording transactions

under both the systems of accounts.

(d) The causes for losses and wastages of a business areprovided by both these

systems of accounts.

(e) The determination of future business policy is guided byboth these systems of

accounts.

(f) A basis for comparison of expenses is being provided by boththe accounting

systems.

(g) Accuracy of accounts is maintained under both the systems bymeans of exercising

check over errors and commissions which might creep in either ofaccounts.

Points of Dissimilarities

Points of Financial Accounts Cost Accounts

differences

1. Purpose The purpose of financial accounts is The purpose ofcost accounting is internal

external reporting mainly to owners, reporting, i.e., to themanagement of every

creditors, tax authorities, government, business.

and prospective investors.

2. Obligation This is to be maintained compulsorily Costaccounts are maintained voluntarily.

to maintain by higher forms of business organisations. In somecases government has directed

accounts The preparation of accounts must be in some companiesto maintain cost accounts

accordance with the statutory provisions. to improveefficiency.

(Contd.)

Nature and Scope of Cost Accounting

10 Cost Accounting and Financial Management

Points of Financial Accounts Cost Accounts

differences

3. Recording (a) Financial accounts records transactions (a)Cost accounts records transactions in

in a subjective manner, i.e., according an objective manner,i.e., according to

to the nature of expenditure. purpose for which costs areincurred.

(b) In financial accounts expenses are (b) In cost accountscosts are expressed

recorded in totals. by proper analysis and classification

in order to find out out cost per unit.

transactions which takes place in the which affect productionand sales.

business.

(d) Financial accounts records only (d) Cost accounts recordsboth historical

historical costs. and estimated costs.

4. Analysis of Financial accounts disclose profit for Costaccounts show the profitability or

profit the entire business as a whole. otherwise of eachproduct, process or

operation so as to reveal the areas of

profitability.

5. Control (a) It does not make use of any control (a) It makesuse of some important control

techniques. techniques such a Marginal Costing,

Budgetary Control, Standard Costing,

etc. in order to control cost.

(b) It does not control materials by using (b) It exercisescontrol over materials using

any technique. some techniques such as ABC analysis,

level setting, economic order quantity,

etc.

efforts are taken to minimise idle time,

over time etc.

6. Duration of Generally, financial accounts provides Costaccounting furnishes cost data at

reporting financial information once a year. frequent intervals.Some reports are daily.

Some are weekly and some monthly.

7. Evaluation The information provided by financial The costdata helps in evaluating the

of efficiency accounts is not sufficient to evaluate theefficiency of the businesses.

efficiency of the business.

8. Pricing It fails to guide the formulation of It providesadequate data for formulating

pricing policy. pricing policy.

9. Valuation Stock is valued at cost or market price Stock isalways valued of cost price.

of stock whichever is less.

DIFFERENCES BETWEEN COST AND MANAGEMENT ACCOUNTING

The American Accounting Association 1958, committee onmanagement accounting

defines management accounting as "the application of appropriatetechniques and concepts

in processing the historical and projected economic data of anentity to assist management

in establishing a plan for reasonable economic objectives and inthe making of rational

decisions with a view towards achieving these objectives." Itincludes the methods and

concepts necessary for effective planning for choosing amongalternative business actions,

and for control through the evaluation and interpretation ofperformance. Its study involves

consideration of ways in which accounting information may beaccumulated, synthesised,

analysed and presented in relation to specific problems,decisions and day-to-day tasks of

business management.

The terminology published by ICMA, London, defines managementaccounting as

"the application of professional knowledge and skill in thepreparation and presentation of

accounting information in such a way as to assist management inthe formulation of policies

and in the planning and control of the operation of theundertaking."

If we examine the above two definitions of management accountingit appears that

both the systems of accounts serve the same purpose. However,they differ from one another

in respect of the following :

Points of Cost Accounting Management Accounting

differences

1. Growth of The history of cost accounting dates back Thissystem of accounting evolved in the

Accounting to fourteenth century. middle of 20th century. Henceit is of recent

origin where compared to cost accounting.

2. Object The main objects of cost accounts is to The mainobjective of management

ascertain and control cost. accounting is to provide usefulinformation

to management for decision-making.

3. Basis of It is based on both present and future It isconcerned purely with the transactions

recording transactions for cost ascertainment. relating tofuture.

4. Scope Cost accounts has narrow scope as it It has a widescope in as much as it covers

covers matters relating to ascertainment the areas of financialaccounts, cost

and control of cost. accounts, taxation, etc.

5. Utility Cost accounts serves the needs of both Managementaccounting serves the needs

internal management and external parties. of only internalmanagement.

6. Types of It deals only with monetary transactions. It dealswith both monetary and nontransactions

i.e., it covers only quantitative aspect. monetary transactions,i.e., both quantitative

dealt with and qualitative aspects.

7. Observation Cost accounts follow a definite principle It doesnot follow a definite principle and

of principles for ascertaining cost and a format format.Instead, the data to be presented

and format for recording. depends up on the need of themanagement.

RELATIONSHIP BETWEEN COST, ESTIMATE AND PRICE

The terms 'estimates', 'costs' and 'prices' are closely relatedto each other in costing. An

estimate is a forecast of the probable cost of a product, job,or process for a future date.

Estimation is purely based on past experience. Cost accountsprovide reliable data on the

basis of which future cost is estimated. However, an estimate isonly an opinion because

there is every chance of commiting mistake while estimating.Estimation is also based on

the future conditions and much depends on guesswork. But suchguesswork must be as far

as possible closer to the facts.

Cost represents actual total cost incurred in manufacturing aproduct or in completing

a job. The total cost of manufacturing a product broadlyconsists of material, labour and

other expenses. The true cost is ascertained either at thevarious stages of completing the

production or at the end of completion of the job. The currentcost serves as the basis for

future estimates. Thus cost is considered as a fact as itrepresents the actual or true cost of

manufacturing a product or completing the job.

Price in costing refers to selling price of a product. Sellingprice is arrived at after

adding a certain margin of profit to the actual cost. Of course,certain other factors also

Nature and Scope of Cost Accounting

12 Cost Accounting and Financial Management

determine the price fixation policy such as demand for theproduct, tastes and preferences

of customers, price of competitive products, future trends ofprices and so on. So price

fixing is regarded as a matter of policy. Hence it has beenpopularly said that an "estimate

is an opinion, cost is a fact and price is a policy."

PURPOSES OR OBJECTS OF COST ACCOUNTS

Costing serves number of purposes among which the following areconsidered to be most

important.

1. Ascertainment of cost : This was considered to be the primaryobjective of cost

accounting in the initial stages of its development. However, inmodern times this has assumed

the secondary objective of cost accounting. Cost ascertainmentinvolves the collection and

classification of expenses at the first instance. Those items ofexpenses which are capable

of charging directly to the products manufactured are allocated.Then the other expenses

which are not capable of direct allocation are apportioned onsome suitable basis. Thus the

cost of production of goods manufactured is ascertained. In thisprocess, cost accounts

involves maintenance of different books to record variouselements of cost. Cost of production

is ascertained by using any of the costing technique such ashistorical costing, marginal

costing, etc.

2. Cost control : At one time cost control was considered assecondary objective of

cost accounts. But in modern times it constitutes the primarypurpose because of its utmost

importance in all business undertakings. Cost control isexercised at different stages in a

factory, viz., acquisition of materials, recruiting anddeployment of labour force, during the

production process and so on. As such we have material costcontrol, labour cost control,

production control, quality control and so on. However, controlover cost is exercised through

the techniques of budgetary control and standard costing. Thecontrol techniques enable the

management in knowing the operating efficiency of abusiness.

3. Determination of selling price : Every business organisationaims at maximising

profit. Total cost of production constitutes the basis on whichselling price is fixed by

adding a margin of profit. Cost accounting furnishes both thetotal cost of production as

well as cost incurred at each and every stage of production. Nodoubt other factors are taken

into consideration before fixing price such as market conditionsthe area of distribution,

volume of sales, etc. But cost plays the dominating role inprice fixation.

4. Frequent preparation of accounts and other reports : Themanagement of every

business constantly rely upon the reports on cost data in orderto know the level of efficiency

relating to purchase, production, sales and operating results.Financial accounts provide

information only at the end of the year because closing stockvalue is available only at the

end of the year. But cost accounts provide the value of closingstock at frequent intervals by

adopting a "continuous stock verification" system. Using thevalue of closing stock it is

possible to prepare final accounts and know the operatingresults of the business.

5. To provide a basis for operating policy : Cost data to agreat extent helps in

formulating the policies of a business and in decision-making.As every alternative decisions

involve investment of capital outlay, costs play an importantrole in decision-making.

Therefore availability of cost data is a must for all levels ofmanagement. Some of

the decisions which are based on cost are (a) make or buydecision, (b) manufacturing

by mechanisation or automation, (c) whether to close or continueoperations in spite of

losses.

FUNCTIONS OF COST ACCOUNTANT

The functions of cost accountant may be enumerated under thefollowing :

Traditional Functions

The traditional functions comprise of the routine functions ofcost accountant. Such

functions are as follows :

(a) To establish various cost centres in the organisation.

(b) To ascertain the cost of every product, job or process bothin terms of total and

per unit of product.

(d) To provide necessary data to enable management in fixing theprice.

(e) To prepare reports on wastages of material, loss of labourtime, idle capacity of

machines so as to improve profitability of business.

(f) To implement cost control techniques such as budgetarycontrol and standard

costing.

(g) To prepare cost schedules to assist management in makingdecisions and in

formulating policies.

(h) To design suitable forms for organising an effective systemof reporting which

ensures provision of adequate cost data to all levels ofmanagement.

(i) To assist management in the valuation of closing stock ofraw materials and

work-in-progress so that too much of capital is not locked up inunnecessary

inventories.

(j) To prepare periodical cost statements and profit and lossaccount.

Modern Functions

In recent times the functions of a cost accountant are not onlyconfined to ascertain and

control cost but extend far beyond these functions. This is onaccount of the additional

responsibilities arising from the various branches ofaccounting, works organisation, office

management and administration, methods of statistical analysis,systems analysis, O and M

studies, modern principles of management, use of computers, etc.These modern functions

are as follows :

(i) Supervising the functions of mechanised accounting.

(ii) Organisation of internal audit in the field ofaccounting.

(iii) To work in close co-ordination with various departmentalmanagers so as to

implement cost reduction programmes and methods ofimprovement.

(iv) To undertake cost audit programmes as per the directivesissued by the

government and the provisions of the Indian Companies Act of1956.

As regards the role of cost accountant in an industry, in hasbeen beautifully summarised

by Mr. Wilmot in his article on "the cost accountant's place inmanagement". According to

him, the role of cost accountant is "that of a historian, newsagent, and prophet". As historian

he must be meticulously accurate, i.e., while supplying costinformation to management he

has to furnish in greater detail with carefulness and exactness.As news agent, he must be

up-do-date, selective and provide full cost information to theneedy person. As a prophet he

must combine knowledge and experience with foresight andcourage.

Nature and Scope of Cost Accounting

14 Cost Accounting and Financial Management

INSTALLATION OF COST ACCOUNTS

At the outset it is to be understood that a common costaccounting system cannot be

installed for all types of business undertakings. The costaccounting system depends upon

the nature of business and the product manufactured. Before asuitable system of cost

accounting is installed it is necessary to undertake apreliminary investigation so as to know

the feasibility of installing cost accounting system to suchbusiness. While introducing a

system of cost accounts it should be borne in mind that costaccounting system must suit the

business. There should not be any attempt to make the businesssuit the system. One more

consideration that is of practical importance is that thebenefits derived from cost accounting

system must be more than the investment made on it. This meansthe system must be simple

and it must lead to savings through the control of materials,labour and overheads when

compared to expenses incurred in maintaining it. For thesuccessful functioning of the

costing system, the following conditions are essential :

(a) There must be an efficient system of material control.

(b) A sound and well designed method of wage payment must be setup.

for its apportionment to various production departments.

(d) The integration of cost and financial accounts to facilitatereconciliation of

profit as shown by these two systems of accounts.

(e) The use of printed forms so as to facilitate quickcompilation of cost reports.

(f) The duties and responsibilities of cost accountant must bemade clear.

Factors to be Considered before Installing a Cost AccountingSystem

The following factors are to be considered before installing acost accounting system :

1. History of business unit : The history of a business unitimplies the duration of its

existence, position in the industry, the rate of growth, policyand philosophy of management

and the like. The history of business unit serves as the basisfor designing the cost accounts

in respect of necessity, simplicity, and investment involved ininstalling cost accounts.

2. Nature of the industry : The nature of business such asmanufacturing, mining,

trading, etc. determines the costing techniques to be applied.Similarly, the type of product

manufactured also determine the method of costing that is to beemployed. In other words,

there is no all purpose technique and method of costing that canbe applied universally.

3. Product range : The range of products manufactured and soldalso determine the

method of costing to be selected. Accordingly range of productsmust be analysed in terms

of size, models, fashions, area of market, competitors andwhether the products are made to

customers specification or for stocking and selling.

4. Technical considerations : Technical considerations thatinfluence the installation

of cost accounts are as follows :

(a) Size and layout of the factory

(b) The existence of production and service departments

(d) Capacity of machines and degree of mechanisation

(e) Existence of laboratories

(f) Internal transport and material handling equipments

(g) Production control techniques

(h) Inspection and testing of materials and finished goods.

5. Organisational factors : The problem of installing costaccounting is somewhat

difficult in case of an existing business when compared to newbusiness. However, the

existing set up of the organisation should be least disturbedshould the need arise. In order

to fix up responsibility to the executives it may be necessaryto group the departments. The

organisational factors to be considered are : (a) size and thetype of organisation such as

line, line and staff, functional and committee organisation, (b)the levels of management,

viz., top level, middle level and bottom level management, (c)extent of delegation and

responsibility, (d) extent of centralisation anddecentralisation, (e) extent of departmentation,

(f) availability of modern office equipments, and (g) number ofmanagerial and supervisory

staff.

6. Selling and distribution method : The chief factors to beconsidered with regard to

distribution process are the warehousing facilities, externaltransport, market research and

other promotional measures, terms of sale and procurement oforders from customers.

7. Accounting aspects : The factors to be considered in respectof accounting are : (a)

number of financial records, (b) existing forms, (c) registersused, and (d) number of copies

required.

8. Area of control to be exercised : The areas where costcontrol is to be exercised is

to be identified so that each manager may take action relevantto his activities. If material

control occupies significant area of control, it must be giventopmost priority for exercising

control over materials.

9. Reporting : The cost accounting system to be installed mustensure frequency and

promptitude in reporting cost data to all levels of management.It must also to be pointed

out that duplication of reporting is to be avoided. Further,only those information which are

relevant for the management in a particular context alone shouldbe reported.

10. Uniformity : The practice of adopting uniform costingfacilitates inter-firm

comparison among various firms belonging to the same industry.Further it also has the

benefit of adopting common costing practice if a holding companyhas number of

subsidiaries.

11. Use of electronic data processing : In modern days it hasbecome a common

practice to use electronic data processing equipments andcomputers. In this situation it is

essential to ensure that the equipment meets the needs of thesystem but not the other way

round.

12. Practical considerations : The cost accounting system to beinstalled must be

flexible in operation and must be capable of adaptation tochanging conditions. The system

must be periodically scrutinised so as to make necessary changesowing to development in

business.

Practical Difficulties in Installing Cost Accounting

In addition to the above problems, a cost accountant willencounter the following

practical difficulties at the time of installation of costaccounting system :

1. Lack of support from management : Wherever costing system isinstalled. It is

essential to seek the support of various departmental managers.Very often the managers

show hostile attitude towards the costing system. They feel thatthis system will interfere in

their routine work and probably as a means of checking theirefficiency. Under such

circ*mstances it is better to convince them about the utility ofcosting system for the business

as a whole.

Nature and Scope of Cost Accounting

16 Cost Accounting and Financial Management

2. Resistance by existing accounting staff : Very often theexisting accounting staff

resist the installation of the cost accounting system on twogrounds. Firstly, they feel that

the new system of accounting might lead to excess work.Secondly, they are afraid of their

job security. But this difficulty may be overcome by encouragingthem about the usefulness

of cost accounting as a supplement to financial accounts and thegeneration of more

employment opportunities from the installation of costaccounting system.

3. Non-cooperation from middle and bottom level management : Attimes the middle

and bottom level managers such as foremen, supervisors andinspectors also fail to extend

their wholehearted cooperation fearing additional work which maybe entrusted to them.

This problem may be overcome by suggesting them about thesimplicity of the system and

the existence of a separate cost accounting department to lookafter costing matters. However,

they may be required to provide necessary reports concerningtheir area of activity so as to

enable functioning of cost accounting departmentefficiently.

4. Lack of trained staff : This was no doubt a problem in oldendays. Today this

problem is overcome, thanks to the establishment of TheInstitute of Cost and Works

Accountant of India in our country which offers professionalcourse in costing and also

offers training facilities through various companies to thecandidates undergoing the course.

In spite of this facility, it is somewhat difficult to get thecompetent and experienced staff at

the time of installation. This problem can be overcome by payingattractive salaries to the

cost accountants.

5. Heavy expenses in installing and maintaining the system : Thesetting up of a

separate costing department with staff often poses a problem. Inaddition to installation, the

operating expenses in the form of printing and stationery,heating and lighting, depreciation

and insurance, rent and rates are to be incurred. However, aswas mentioned earlier, the

system of cost accounting must be a useful investment, i.e.,benefits derived from it must be

more than the investment made on it. If this is not possible,for the time being the system

must be discarded.

REQUISITES OR ESSENTIALS OF COST ACCOUNTING SYSTEM

The following are the essentials of an ideal cost accountingsystem :

1. Accuracy : The system of cost accounting must provide foraccuracy in terms of

both cost ascertainment and presentation. Otherwise it willprove to be misleading.

2. Simplicity : Cost accounting system involves detailedanalysis of cost. To avoid

complications in the procedure of cost ascertainment anelaborate system of costing should

be avoided and every care must be taken to keep it as simple aspossible.

3. Elasticity : The cost accounting system should be capable ofadopting itself to the

changing situations of business. It must be capable of expansionor contraction depending

upon the needs of the business.

4. Economy : The costs of operating costing system must be less.It must result in

increased benefit when compared to the expenditure incurred ininstalling it.

5. Comparability : The records to be maintained must facilitatecomparison over a

period of time. The past records must serve as a basis to guidethe future.

6. Promptness : An ideal costing system is one which providescost data in an analytical

form to the management. So all the departments of a factory mustanalyse and record the

relevant items of cost promptly in order to furnish costinformation on a regular basis to

various levels of management. This helps in checking up theprogress of the business on a

regular basis.

7. Periodical preparation of accounts : With a view tofacilitate the comparison of

results frequently, it is desirable to prepare accountsperiodically. Constant comparison of

actual result with standard result enables to spot out areas ofinefficiency. This can be set

right by taking remedial measures.

8. Reconciliation with financial accounts : The system of costaccounts must be

capable of reconciling with financial accounts so as to checkaccuracy of both the system of

accounts.

9. Uniformity : The various forms and documents used undercosting system must be

uniform in size and quality of paper. Printed forms must be usedto avoid delay in the

preparation of reports. This also reduces the burden of clericalstaff. Forms of different

colours can be used to distinguish different documents.

10. Equity : The basis of apportioning indirect expenses toproducts, departments or

jobs must be fair and equitable.

ORGANISATION OF COST ACCOUNTING DEPARTMENT

The organisation of cost accounting department depends upon thesize of the concern.

Whatever may be the structure of cost accounting department in afactory, it is established

to serve the following purposes : (i) To compile cost data inorder to meet the statutory

requirement wherever applicable, (ii) To provide necessary costdata to management to

carry out its functions efficiently, and (iii) To ensureefficiency and economy in the

functioning of cost accounting department. To achieve the abovepurposes cost accounting

department usually performs the following functions :

(1) Designing and installation of appropriate method ofcosting.

(2) Accumulation of cost data by process, department andproduct.

(3) Analysis of such cost by elements of cost.

(4) Estimation of cost of production.

(5) Reporting of cost information to all levels ofmanagement.

(6) Advising management in relation to investment based on costinformation.

In a small and medium-sized concern, the cost accountingdepartment may be set up as

a section of financial accounting system. The cost accountantwho is incharge of cost

accounting department may be authorised to report to the chiefaccountant. In large-sized

concern, a separate cost accounting department is establishedunder the supervision of a

full-fledged cost accountant. The cost accounting department isequipped with sufficient

staff each to look after different facets of cost accountingfunction. While important functions

such as budgeting, cost analysis, etc. are performed by costaccountant, cost recording, cost

reporting and such other functions are performed by costclerks.

The cost accounting department may be organised either on theprinciple of centralisation

or decentralisation. Under centralised system, the functions ofcost accounting departments

relating to all firms belonging to same industry is performed ata common central place.

The extent of centralisation of cost accounting departmentdepends upon the following

factors :

(a) The philosophy of management regarding divisionalresponsibility.

(b) The ready availability of cost data from each firm.

(d) The area of operations of every firm.

(e) The economy involved in centralisation process.

Nature and Scope of Cost Accounting

18 Cost Accounting and Financial Management

Advantages of Centralised Cost Accounting Department

1. It facilitates full utilisation of services of costingstaff.

2. It permits mechanisation of accounting which is not possibleunder decentralisation

system.

3. It reduces paper work and economise stationery costs.

4. It facilitates prompt reporting.

Under decentralisation system a separate cost accountingdepartment is set up for each

and every firm under the supervision of a competent costaccountant. This system has certain

advantages.

(a) It tends to increase the initiative of the cost accountantsof every firm as the

responsibility to control lies in their hands.

(b) It eliminates duplication of recording and reporting.

Relationship of Cost Department to Other Departments

1. Cost accounting department and production department : It canwell be said that

production department and cost department are interwoventogether as the former cannot

function efficiently without the existence of the latter. Theproduction process is concerned

with the utilisation of materials, money and human resources.The cost department helps in

estimating the material cost, labour cost and other expenses formanufacturing a product. It

also helps in controlling these costs so as to minimise the costor production. In fact, the

main objective of cost accounting system is to reduce the costof production of goods or

services manufactured and rendered by business units. The otherareas where cost accounting

department is helpful in manufacturing process are : (a)Engineering department which is

concerned with designing a product, (b) Research and developmentdepartment which is

concerned with development of a new product, (c) Productionplanning and control

department which ensures completion of production within thetime schedule, and (d) Quality

control section, which ensures quality of products. All thesedepartments heavily rely on

cost accounting department because costs to be incurred in thesedepartments have a direct

impact over the functioning of these departments.

2. Cost accounting department and personnel department : Thepersonnel

department which is concerned with proper recruitment,selection, training, time-keeping,

fixation of wage rate and preparation of payroll, will work withclose co-ordination of cost

department. Each and every function performed by personneldepartment is again influenced

by additional cost to be incurred on such function as forexample promotion of employees

leads to incurrence of additional wages.

3. Cost accounting department and finance department : Thefinance department is

concerned with receiving and disbursem*nt of cash. Theallocation of investments on fixed

and working capital entirely depends upon the cost reportssubmitted to it by the cost

department. Judicious utilisation of available capital ispossible only when priority is given

for more important areas of investment. This is facilitated byfurnishing prompt report by

cost department.

4. Cost accounting department and purchase department : Inmajority of firms

purchase of raw materials at right quantity, of right quality,from right supplier, at a right

time not only ensures ready supply but also at a reasonably lowprice. Any purchase of

substandard quality of materials will lead to dissatisfactionamong customers and

consequently it leads to loss of orders. Further, purchase ofmaterials at high rate will increase

the cost of production tremendously. Delay in getting suppliesof materials lead to delay in

executing customers orders. In these respects cost accountingdepartment can assist purchase

department to ensure efficient purchasing. Cost department alsohelp in reducing (a) waste

of materials, (b) the risk from theft, and (c) excessiveinvestment in inventories.

5. Cost accounting department and marketing department :Marketing department

relies on cost information in order to (a) estimate futureproduct cost for fixing the selling

price, (b) in knowing the expenses incurred in marketing theproducts so that if the amount

exceeds the target, control measures can be taken to reduce suchexpenses, (c) to consider

alternative selling methods and promotional measures, and (d) tomake further investment

in warehousing and distribution process. Cost departmentprovides all such information as

is required by the marketing department for its efficientfunctioning.

6. Cost accounting department and financial accountingdepartment : The existence

of cost accounting department makes the financial accountingdepartment a complete

organisation by furnishing additional cost data to the chiefaccountant. Cost department

enable financial accounts department in carrying out thelatter's function furnishing necessary

data in respect of the following :

(a) Supply of material cost, labour cost and expenses tofacilitate preparation of

manufacturing account.

(b) Provision of the value of closing stock frequently tofacilitate the preparation of

interim final accounts.

and in solving legal matters.

(d) Enables financial accounting department to settle the billsby duly approving

them.

(e) Helps financial accounting department in budgeting.

ADVANTAGES OF COST ACCOUNTING

A good costing system serves the needs of a large sections ofpeople. The advantages of

cost accounting are discussed below.

Advantages of Cost Accounting to Management

1. Fixation of responsibility : Whenever a cost centre isestablished, it implies

establishing a kind of relationship between superior andsubordinates. Thus responsibilities

are fixed on every individual who is concerned with incurrenceof cost.

2. Measures economic performance : By applying cost controltechniques such as

budgetary control and standard costing it helps in assisting theperformance of business.

3. Fixation of price : By providing cost data it helpsmanagement to fix the selling

price in advance. Hence, quotations can be supplied toprospective customers to secure

orders.

4. Aids in decision-making : It helps management in makingsuitable decisions such

as make or buy, replace manual labour by machines, shut down orcontinue operations

based on cost reports.

5. Helps in the preparation of interim final accounts : By theprocess of continuous

stock taking it enables to know the value of closing stock ofmaterials at any time. This

facilitates preparation of final accounts wherever desired.

Nature and Scope of Cost Accounting

20 Cost Accounting and Financial Management

6. Helps in minimising wastages and losses : Cost accountingsystem enables to locate

the losses relating to materials, idle time and underutilisation of plant and machinery.

7. Facilitates comparison : It facilitates cost comparison inrespect of jobs, process,

departments and also between two periods. This reveals theefficiency or otherwise of each

job process or department.

8. Assists in increasing profitability : Costing reports provideinformation about

profitable or unprofitable areas of operation. The managementcan discontinue that product

line or that department which are responsible for incurringlosses. Thereby only profitable

line of activities alone are retained.

9. Reconciliation with financial accounts : A well maintainedcost accounting system

facilitates reconciliation with financial accounts to check thearithmetical accuracy of both

the systems.

10. It guides future production policy : Cost data helpmanagement in determining

future production policy. Any expansion or contraction ofproduction for the future is based

on past cost data.

Advantages to Employees

1. Cost accounting system enables employees to earn better wagesthrough overtime

wages and incentive systems of wage payment.

2. By providing better facilities it ensures job security toemployees.

3. Employees benefit by merit rating techniques which isconducted by scientific process.

Advantages to Creditors

1. It increases the confidence of creditors in the capitalemployed in the business.

2. The frequent preparation of reports and statements help inknowing solvency position

of the business.

Advantages to the Government

1. It helps government in formulating policies regarding export,import, taxation, price

control measures, wage fixation, etc.

2. It helps in assessing excise duty, sales tax and income taxof the business.

3. Costing information helps in preparing national plans.

Advantages to Society

1. Cost reduction and cost control programmes go to minimisecost of production of

goods and services. A portion of the reduced cost of productionis shared by customers by

paying less price for goods and services.

2. It offers employment opportunities in the cost accountingdepartment in the capacity

of cost accountants and cost clerks.

LIMITATIONS OF COST ACCOUNTING

1. It is expensive : The system of cost accounting involvesadditional expenditure to

be incurred in installing and maintaining it. However, beforeinstalling it, care must be

taken to ensure that the benefits derived is more than theinvestment made on this system of

accounting.

2. The system is more complex : As the cost accounting systeminvolve number of

steps in ascertaining cost such as collection and classificationof expenses, allocation and

apportionment of expenses, it is considered to be complicatedsystem of accounts. Moreover

the system makes use of several documents and forms in preparingthe reports. This will

tend to delay in the preparation of accounts.

3. Inapplicability of same costing method and technique : Allbusiness enterprises

cannot make use of a single method and technique of costing. Itall depends upon the nature

of business and type of product manufactured by it. If a wrongtechnique and method is

used, it misleads the results of business.

4. Not suitable for small scale units : A cost accounting systemis applicable only to

a large-sized business but not to a small-sized one. Hence,there is limitation to its application

to all types of business.

5. Lack of accuracy : The accuracy of cost accounts getdistorted owing to the use of

notional cost such as standard cost, estimated cost, etc.

6. It lacks social accounting : Cost accounting fails to takeinto account the social

obligation of the business. In other words, social accounting isoutside the purview of cost

accounts.

CRITICISMS OR OBJECTIONS LEVELLED AGAINST COST ACCOUNTS

Despite several benefits offered by cost accounts, critics havelevelled the following

criticisms against it :

1. Cost accounting is merely a system of estimates andprobabilities : Though the

main purpose of cost accounting is to ascertain the cost ofproduction with a reasonable

degree of accuracy, yet absolute accuracy is not possible owingto the two reasons.

(a) Indirect expenditures are absorbed on the basis ofpredetermined rates instead of actual

rates, and (b) The material cost and labour cost is inflated soas to cover the normal loss and

wastage of materials and normal idle time of workers.

2. Cost accounting is unnecessary in such business enterpriseswhich make large

profit : It is argued that industries which earn large amount ofprofit need not have a system

of cost accounting. This statement is absolutely wrong. Earningof more profit by industry

does not necessarily mean that its cost of production is lowestand there is no scope for

further reduction in the cost. Profit represents the differencebetween the selling price and

the cost of a product. Profit earned by a business may be highbecause of increased price

prevailing in the market. Two or more than two productsmanufactured by business may

earn profit for one line of product and loss by other. Theprofit earned by one product may

outweigh the loss suffered by other product thus resulting inoverall profit. So it is wrong to

judge the efficiency of the business on the basis of overallprofitability of the business. If

necessary steps are taken to reduce or eliminate losses sufferedby a second line product,

the industry would earn more amount of profit. It is in thiscontext that a system of costing

is felt.

3. It is unnecessary : This criticism is levelled owing to lackof understanding of the

objectives and advantages of costing. In the present-daycompetitive world, every

manufacturer must know the cost of production for each articleso that he can fix selling

price on a reliable and reasonable basis. Further he can alsocompare his selling price thus

fixed with the price prevailing in the market. Costascertainment involves application of

certain principles and techniques. Having ascertained the cost,control techniques are used

to keep the costs under check and thereby increase the profit.Thus it can be said that cost

accounting is necessary in most of the concerns.

Nature and Scope of Cost Accounting

22 Cost Accounting and Financial Management

4. It is expensive : This criticism is true as long as thebenefits derived from this

system is not commensurate with the investment made on it. Butby carefully designing the

system so as to suit the business, the criticism can benullified.

5. Competition governs price and hence there is no need forcosting system : Some

critics contend that in these days of competition prices aredetermined by the forces of

demand and supply as against fixation of selling price by addinga desired margin of profit

on the cost price. This argument is incorrect. Even in thissituation cost accounts disclose

the margin of profit that is earned by comparing the marketprice and cost of production. It

impresses upon management the need to reduce cost by increasingthe volume of production

or by elimination of losses and wastages if any. If the costprice tend to be higher than the

market price, it is desirable to abandon such product line andpay attention to profitable line

of products.

6. There is no need for costing where production efficiency ishigh : The statement

is misleading as without a yardstick to measure the efficiencyit is not possible to appraise

the efficiency of a business. Cost accounting system offersnumber of techniques such as

standard costing, budgetary control, inter-firm comparison andso on. The cost of production

can also be compared between two periods of time to know whetherbusiness is currently

running efficiently when compared to previous year. In case ofinefficient operation remedial

measures can be taken to improve the business.

7. Other objections : Some other objections that are raisedagainst the installation of

cost accounting system are follows :

(a) It is a mere matter of forms and rulings : Often it isargued that the cost accounting

system degenerates into a matter of mere forms and rulings. Thisis not the defect of cost

accounting system but the way in which the system is maintained.No doubt different forms

are necessary under costing system but they must be simplifiedand altered to meet the

changing condition.

(b) Failure in many cases : The system of cost accounting isoften condemned as

defective inasmuch as it has failed to produce the desiredresult. The defect does not lie in

the costing system but for some other reasons such asindifferent attitude of the management,

lack of adequate facilities, non-cooperations or opposition fromemployees. These defects

can be overcome by reversing the above trend.

that its application was not felf in the past. Though it was notused earlier, still many industries

prospered. So it is felt by some critics that the installationof costing involves unnecessary

expenditure. However it is to be remembered that todays businessfunctions in a competitive

conditions and every manufacturer must know the actual cost ofproduction in order to

reduce the selling price. Many industrial failures in the pastmay be attributed to the lack of

knowledge on the part of management relating to the actual costof production thereby

selling product below cost.

QUESTIONS

I. A. Indicate whether the following statements are True orFalse

1. Cost accounting is not needed for a non-profit organisationsuch as a club. T/F

2. If management is not interested in costing information, thereshould be no costing department. T/F

3. The cost accounting system is designed in such a way the flowof costs parallel the physical movement

of products. T/F

4. Effective control of cost can be secured only if theresponsibility for cost incurrence is

clearly defined. T/F

5. Installation of a suitable system of cost accounting isrestricted to manufacturing concerns only. T/F

6. Cost Audit is a part of cost accounting. T/F

7. Both financial accounts and cost accounts are written up withthe same basic documents. T/F

8. Since pricing is a matter of management policy costinformation is useless for price fixation. T/F

9. A concern that has been quite prosperous needs no costingsystem. T/F

10. Cost accounting is a branch of financial accounts. T/F

[Answers : True-2, 3, 4, 6, 7

False-1, 5, 8, 9, 10]

B. Choose the correct answer from the following

1. Which one of the following is most important tool in costplanning

(a) cost unit (b) direct cost

2. Cost accounting concepts include all the following except

(a) planning (b) profit sharing

3. The principal factor to be considered in designing a costsystem include

(a) company organisation structure (b) nature of business

4. The chief objective of cost accounting is to

(a) earn more profit (b) increase production

5. Cost accounting is

(a) nothing more than a detailed analysis of expenditure

(b) an instrument of management control

(d) not needed if prices are beyond the control of the firm

6. The need for cost accounting arises as it helps in

(a) ascertaining and control of cost (b) increasing thesales

7. The primary objective of cost accounting in modern timeis

(a) cost ascertainment (b) cost control

8. The purpose of financial accounting is to provide informationfor

(a) fixing prices

(b) recording expenses

(d) assessing the profitability and financial position of thefirm

9. Which one of the following is not a factor to be consideredin designing a cost system

(a) price factor (b) organisational factor

10. Cost accounting differs from financial accounting in respectof

(a) recording cost (b) ascertaining cost

[Answers : 1(d), 2(b), 3(d), 4(c), 5(b), 6(a), 7(b), 8(d), 9(a),10(c)]

C. Match the following :

List A List B

1. Financial accounting provides (a) management needs

2. One of the objections against costing (b) ascertainment ofprofit of business

3. Cost accounting was evolved (c) is expensive

4. Financial accounting is concerned with (d) find the actualcost of product

5. Cost accounting is concerned with (e) factual financialinformation

[Answers : 1-e, 2-c, 3-d, 4-b, 5-a]

Nature and Scope of Cost Accounting

24 Cost Accounting and Financial Management

SECTION-A - SIMPLE QUESTIONS

1. Define Cost Accounting. (Bangalore University, B. Com., April2000)

2. Distinguish between costing and cost accounting. (BangaloreUniversity, M. Com., 1998)

3. Mention any two uses of cost accounting system tomanagement.

(Bangalore University, B. Com., November 1999)

4. Mention two limitations of costing. (Bangalore University, B.Com., November 1997)

5. Distinguish between cost, estimate and price. (SriKrishnadevaraya University, B. Com., March 1997)

6. State any four items which are not included in costaccounts.(Bangalore University, B. Com., April 1995)

7. Mention steps that you should take to instal costaccounting.

(Bharathidasan University, B. Com., November 1995)

8. Mention two objects of cost accounting. (M G. University, B.Com., April 1994)

9. What are the limitations of financial accounting? (OsmaniaUniversity, B. Com., October 1996)

SECTION-B

SHORT ANSWER QUESTIONS

1. "Cost accounting is becoming more and more relevant in theemerging economic scenario in India."

comment. (C.S. Intermediate, June 2000)

2. "Cost accounting system that simply records costs for thepurpose of fixing sale price has accomplished

only a small part of its mission"-Explain. (C.S. Intermediate,June 1999)

3. "Selling price is always based on total cost"-comment. (C.S.Intermediate, June 1999)

4. "Cost accounts are key to aconomy in manufacture and oneindispensable to the intelligent and economical

management of a factory"-Discuss. (C.S. Intermediate, June1998)

5. State the steps involved in the installation of a costingsystem in a large manufacturing company.

(C.S. Intermediate, June 1997) (S. V. University, B. Com., Sept.94)

6. Cost accounting is a system of foresight and not a postmortemexamination, it turns losses into profits,

speeds up activities and eliminates wastes. comment. (C.S.Inter. December 1997)

7. State in differences between financial accounts and costaccounts.

(Bharathidasan University, B. Com., April 1998)

8. What are the main characteristics of an ideal cost accountingsystem?

(M.G. University, B. Com., September 1994)

9. What is costing? What are its objectives? (CalcuttaUniversity, B. Com., October 1997)

10. Describe the pre-requisites for the installation of costaccounting system.

(Karnataka University, M. Com., April 1997)

11. Write a note on cost control. (Mangalore University, B.Com., April 1997)

12. What is cost accounting? What are its objectives? In whatrespects does cost accounting differ from

financial accounting? (Mangalore University, B. Com., October1996)

13. Distinguish between cost ertimation and cost ascertainment.(University of Kerala, B. Com., April 1996)

14. State the advantages of cost accounting. (BangaloreUniversity, B. Com., November 1992)

SECTION-C

LONG ANSWER QUESTIONS

1. State the objectives of cost accounting briefly explain theadvantages of cost accounting.

(University of Mysore, B. Com., April 1998)

2. Define "Costing", "Cost" and "Cost Accountancy". Distinguishbetween cost accounting and financial

accounting. (University of Mysore, B. Com., April 2000)

3. "A Good system of costing must place the same emphasise oncost control as on cost ascertainment".

Comment on this statement. (University of Mysore, B. Com.,October 1999)

4. "Cost accounting is better understood as a cost control andcost reduction exercise and not a more cost

ascertainment process". Discuss. (University of Mysore, B. Com.,April 1997)

5. "Cost accounting is a system of foresight like pre-natalcare, but financial accounting is just a postmortem

examination". Critically examine this statement. (University ofMysore, B. Com., October 1996)

6. What one the limitations of financial accounting? How do youovercome item in cost accounting?

(University of Mysore, B. Com., November 1995)

7. Define costing. How does it differ from financial accounting?Explain its importance under present

circ*mstances. (University of Mysore, B. Com., November1998)

8. State the advantages of costing. How it aids the managementand what objections are raised against cost

accounts? (University of Mysore, B. Com., November 91)

9. Define costing. Discuss briefly the objectives and advantagesof costing.

(S. V. University, B. Com., April 1998)

10. Define cost accounting and bring out the differences betweencost accounts and Financial accounts.

(Madurai Kamaraj University, B. Com., April 1998)

11. Define costing critically evaluate the arguments for theinstallation of costing system in an industry.

(Mangalore University, B. Com., April 1998)

12. What one the objectives of cost accounting? What are itsadvantages and limitations?

(Nagarjuna University, B. Com., March 1998)

13. Cost accounting has become an essential tool of management.Mention the steps to be taken while

installing cost accounting system in a manufacturingconcern.

(Sri Krishnadevaraya University, M. Com., April 1998)

14. What are the objectives of cost accounting and what is therelation with Management accounting

department? (S. V. University, B. Com., September 1995)

15. "Cost accounting has become an essential tool of modernmanagement". comment.

(Mangalore University, B. Com., April 1994)

16. Explain briefly the objects advantages and limitations ofcosting.

(Sri Krishnadevaraya University, B. Com., April 1994)

17. Define cost accounting. How does a good system of costaccounting serve the management.

(Bharathidasan University, B. Com., April 1994)

18. Discuss the limitations of financial accounting and explainthe importance of cost accounting.

(M.G. University, B. Com., April 1996)

19. "An efficient system of costing is essential factor forindustrial control under modern conditions of

business and as such may be regarded as an important part in theefforts of any management to secure

business stability"-Elaborate. (Mangalore University, B. Com.,September 1997)

20. What is meant by cost accounting? Discuss in detail theadvantages of the cost accounting.

(Madurai Kamaraj University, B. Com., April 1997)

21. What do you mean by installation of costing system? Explainthe practical difficulties involved in

installing such a system in a manufacturing concern. (OsmaniaUniversity, B. Com., October 1996)

22. Explain the advantages of cost accounting. What are thedifferences between cost accounting and

Financial accounting (Sri Krishnadevaraya University, B. Com.,October 1996)

23. "A good costing system is an involvable aid to management."Discuss.

(Osmania University, B. Com., March 1996)

24. How cost accounting is superior over financial accounting?Explain the techniques of costing and their

application and suitability. (Karnataka University, M. Com., May1996)

25. What is cost accounting? What are its objectives?Discuss.

(Mangalore University, B. Com., October 1995)

26. "Cost accounting has become an essential tool ofmanagement". Comment and state the steps to be

taken while installing a costing system in a manufacturingconcern.

(Bangalore University, M. Com., May 1995)

27. Explain the advantages of cost accounting. (University ofKerala, M. Com., May 1995)

28. Explain the significance of cost accounting in amanufacturing company.

(Sri Krishnadevaraya University, M. Com., April 1995)

Nature and Scope of Cost Accounting

What is cost accounting system of foresight and not a postmortem examinationIt turns losses into profits speed up activities and eliminates waste? - Answers (2024)

References