Cost Department And Its Relationship With Other Departments

Cost Department And Its Relationship With Other Departments

In the organization chart, the cost department occupies a very important position. The cost department is responsible

• For keeping records connected with material, labour and expenses,
• For analyzing all costs of manufacturing, marketing and administration, and
• For issuing control reports and data for decision making to the executives, department heads, section heads and foremen. When management is provided with useful reports, they assist in controlling and improving cost and operations. Such information data are, again, used for making new decisions.

The effectiveness of the control of cost depends upon proper communication through control reports from the cost accountant to the various levels of operating management. Accounting and control reports are directed to these levels of management, i.e. top management, middle management and lower level or shop floor level of management. Each management level requires data for deciding and solving various problems. The cost accountant must devise a cost system into which data are marshalled to fit the numerous problems confronting management. The cost department is intimately connected with the other departments in the organization. Their relationship can be briefly established as follows:–

• Manufacturing departments control the scheduling, manufacturing and inspection of each job or processed products to their finished stage in terms of efficiency norms established. Costs incurred at each stage are measured and compared with the norms.
• Production planning, research and design department involve cost department for cost estimates needed for each type of material, labour and machine process before a decision can be reached in accepting or rejecting a design.
• Personnel department is interested to maintaining employee cost up-to-date. The wage rate and methods of remuneration agreed with the employees form the basis for computing payroll. Cost department provides all data.
• Marketing department needs a good product at a competitive price. While cost cannot determine price, it can influence fixation of price. Besides, accurate cost data help sales manager distinguish profitable with non-profitable products and compare cost of marketing against sales volume.
• Public relation department establishes good relations with the public in general and customers, creditors, shareholders, and employees in particular. The cost department provides information concerning price, cost, etc.
• Legal department finds cost department helpful in keeping many affairs of the company in conformity with the law, specially excise, customs, sales tax and other legislation regarding maintenance of accounts and cost records.
• The finance department relies on the cost department for accounting, valuation of inventory, cash flow statements, C.A.S. data for banks, etc. Where finance department is composed of general accounting and cost accounting, besides taxation and funds management departments, it is usual to consider cost accounting department providing unit cost of goods manufactured and sold to general accounting department.

 

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Objectives Of Cost Accounting

Objectives Of Cost Accounting

The objectives of cost accounting are ascertained of cost, fixation of selling price, proper recording and presentation of cost data to management for measuring efficiency and for cost control.  The aim is to know the methods by which expenditure on materials, wages and overheads is recorded, classified and allocated so that the cost of products and services may be accurately ascertained; these costs may be related to sales and profitability may be determined.  Yet with the development of business and industry, its objectives are changing day by day.  The following are the main objectives of cost accounting:

• To ascertain the cost per unit of the different manufactured by a business concern;
• To provide a correct analysis of cost both by process or operations and by different elements of cost;
• To disclose sources of wastage whether of material, time or expense or in the use of machinery, equipment and tools and to prepare such reports which may be necessary to control such wastage;
• To provide requisite data and serve as a guide for fixing prices of products manufactured or services rendered;
• To advise management as to how these profits can be maximized and to ascertain the profitability of each of the products;
• To exercise effective control of stocks of raw materials, work-in-progress, consumable stores and finished goods in order to minimize the capital locked up in these stocks;
• To reveal sources of economy by installing and implementing a system of cost control for labour, overheads and materials;
• To advise management on proposed capital projects and future expansion policies;
• To present and interpret data for management planning, evaluation of performance and control;
• To help in the implementation and preparation of budgets of budgetary control;
• To organize 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 implementation and formulation of incentive bonus plans based on cost savings and productivity;
• To supply useful data to management for taking various financial decisions such as introduction of new products, replacement of labour by machine etc;
• To help in supervising the working of punched card accounting or data processing through computers;
• To organize the internal audit system to ensure effective working of different departments;
• To organize cost reduction programmes with the help of different departmental managers;
• To provide specialized services of cost audit in order to prevent the errors and frauds and to facilitate prompt and reliable information to management.

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Cost Classification

Cost Classification

Cost classification refers to the process of grouping costs according to their common characteristics, such as nature of expense, function, variability, controllability and normality.  Cost classification can be done on the basis of time, their relation with the product and accounting period. Cost classification is also made for planning and control and decision making. Thus, classification is essential for identifying costs with cost centers or cost units for the purpose of determination and control of cost:

• By nature of expenses: Costs can be classified into material, labour and expenses as explained earlier.
• By function: Costs are classified, as explained earlier, into production or manufacturing cost, administration cost, selling and distribution cost, research and development cost.
• By variability: Costs are classified into fixed, variable and semi-fixed / semi-variable costs according to their tendency to vary with the volume of output.
• By controllability: Costs can be classified under controllable cost and uncontrollable cost.
• By normality: Costs can be divided into normal cost and abnormal cost.
  • Normal cost refers to the cost, at a given level of output in the conditions in which that level of output is normally attained.
  • Abnormal cost is a cost which is not normally incurred at a given level of output in the conditions in which that level of output is normally attained.
• On the basis of time: Costs may be classified into historical or actual cost and predetermined or future cost.
  • Historical cost relates to the usual method of determining actual cost of operation based on actual expenses incurred during the period. Such evaluation of costs takes longer time, till the accounts are closed and finalized, and figures are ready for use in cost calculations.
  • Predetermined cost as the name signifies is prepared in advance before the actual operation starts on the basis of specifications and historical cost data of the earlier period and all factors affecting cost. Predetermined cost is the cost determined in advance and may be either estimated or standard.
  • Estimated cost is prepared before accepting an order for submitting price quotation. It is also used for comparing actual performance.
  • Standard cost is scientifically predetermined cost of a product or service applicable during a specific period of immediate future under current or anticipated operating conditions.
• In relation to the product: Costs may be classified into direct and indirect costs.
  • Direct costs are those which are incurred for a particular cost unit and can be conveniently linked with that cost unit. Direct costs are termed as product cost.
  • Indirect costs are those which are incurred for a number of cost units and also include costs which though incurred for a particular cost unit are not linked with the cost unit. Since such costs are incurred over a period and the benefit is mostly derived within the same period, they are called period costs.

 

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Importance Of Cost Accounting

Importance Of Cost Accounting

The limitation of financial accounting has made the management to realize the importance of cost accounting. The importance of cost accounting is as follows:

• Importance to Management

  Cost accounting provides invaluable help to management. It is difficult to indicate where the work of cost accountant ends and managerial control begins. The advantages are as follows:

  • Helps in ascertainment of cost

    Cost accounting helps the management in the ascertainment of cost of process, product, Job, contract, activity, etc., by using different techniques such as Job costing and Process costing.

  • Aids in Price fixation

    By using demand and supply, activities of competitors, market condition to a great extent, also determine the price of product and cost to the producer does play an important role. The producer can take necessary help from his costing records.

  • Helps in Cost reduction

    Cost can be reduced in the long-run when cost reduction programmer and improved methods are tried to reduce costs.

  • Elimination of wastage

    As it is possible to know the cost of product at every stage, it becomes possible to check the forms of waste, such as time and expenses etc., are in the use of machine equipment and material.

  • Helps in identifying unprofitable activities

    With the help of cost accounting the unprofitable activities are identified, so that the necessary correct action may be taken.

  • Helps in checking the accuracy of financial account

    Cost accounting helps in checking the accuracy of financial account with the help of reconciliation of the profit as per financial accounts with the profit as per cost account.

  • Helps in fixing selling Prices It helps the management in fixing selling prices of product by providing detailed cost information.
    
• Importance to Employees

  Worker and employees have an interest in which they are employed. An efficient costing system benefits employees through incentives plan in their enterprise, etc. As a result both the productivity and earning capacity increases.
  

• Cost accounting and creditors

  Suppliers, investor’s financial institution and other moneylenders have a stake in the success of the business concern and therefore are benefited by installation of an efficient costing system. They can base their judgment about the profitability and prospects of the enterprise upon the studies and reports submitted by the cost accountant.

• Importance to National Economy

  An efficient costing system benefits national economy by stepping up the government revenue by achieving higher production. The overall economic developments of a country take place due to efficiency of production.

• Data Base for operating policy

  Cost Accounting offers a thoroughly analyzed cost data which forms the basis of formulating policy regarding day to day business.

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Advantages And Disadvantages Of Marginal Costing

Advantages And Disadvantages Of Marginal Costing

Components and spare parts may be made in the factory instead of buying from the market. In such cases, the marginal cost of manufacturing the components or spare parts should be compared with market price while taking decision “to make or buy”. If marginal cost is lower than the market price, it is more profitable to make than purchasing from market. Additional or specific fixed cost may be a relevant cost. Following are the advantages of Marginal Costing:

• Variable cost remains constant per unit of output and fixed costs remain constant in total during short period. Thus control over costs becomes more effective and easier.  Standards can be set for variable costs, while Budgets can be established for fixed cost in order to exercise full control over the total activities.
• Marginal costing brings out contribution or profit margin per unit of output, and clearly brings out the effect of change in activity. It facilitates making policy decisions in a number of management problems, such as determining profitability of products, introducing a new product, discontinuing a product, fixing selling price, deciding whether to make or buy, utilising spare capacity, profit-planning, etc.
• The distinction between product cost and period cost helps easy understanding of marginal cost statements.
• Closing inventory of work-in-progress and finished goods are valued at marginal or variable cost only. This method leads to greater accuracy in arriving at profit as it eliminates any carry over of fixed costs of the previous period through inventory valuation.
• As a corollary to above, since fixed costs do not enter into product-cost, it eliminates the process of allocating, apportioning and absorbing overheads, and adjusting underand over-absorbed overheads. Therefore, the method is simpler to operate.

Disadvantages or Limitations of Marginal costing are as follows:

• The technique is based on the segregation of costs into fixed and variable ones, while many expenses are neither totally fixed nor totally variable at various levels of activity.Thus, classifying all expenses into two categories of either fixed or variable is a difficult task.
• The assumptions regarding behaviour of costs, such as, fixed cost remains static, are often not realistic.
• Contribution is not the only index to take decisions. For example, where fixed cost is very high, selling price should not be fixed on the basis of contribution alone without considering other key factors such as capital employed.
• Marginal cost, if confused with total cost while fixing selling price may lead to a disaster.
• Inventory valuation at marginal cost will understate profits and may not be acceptable by tax-authorities. Any claim based on cost will be very low, as it will not have a share of fixed cost.

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Definition Of Costing

Cost Accounting

Cost Accounting is a method of accounting in which all elements of cost incurred in carrying out an activity or accomplishing a purpose are collected, classified, and recorded. This data is then summarized and analyzed to arrive at a selling price, or to determine where savings are possible. In contrast to financial accounting cost accounting considers it as the economic factor of production.

Purposes of Cost Accounting:

Ascertainment of costs: The first and foremost purpose of cost accounting is to ascertain the cost using various costing methods.

Determining and controlling efficiency: A cost accountant must study the various operations in involved in the manufacture of products. This study will enable him to render the service of measuring the efficiency of the organization and in doing so he will be able to devise means of exercising efficiency.

Determining the selling price: Cost accounting provides detailed and relevant cost figures for determining the selling price of products or services

Preparation of financial statement: Where cost accounts are kept, the ascertainment of the value of closi8ng stocks of raw materials, work-in-progress and finished goods becomes easy and as such financial statements can be prepared monthly or even weekly.

Providing a basis for operating policy:  Cost accounting plays an important role in the management for formulating the operating policies.

Components of a Cost Accounting System:

A cost accounting system requires five components which include 1) an input measurement basis, 2) an inventory valuation method, 3) a cost accumulation method, 4) a cost flow assumption, and 5) a capability of recording inventory cost flows at certain intervals. It is well designed from the various combinations of the alternatives, although not all of the alternatives are compatible. Selecting one part from each category provides a basis for developing an operational definition of a specific cost accounting system.

 

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Meaning Of Costing And Cost Accounting

Meaning Of Costing And Cost Accounting

Costing is a technique and process of ascertaining costs.  This technique consists of principles and rules which govern the procedure of ascertaining the cost of products/services.  The process of costing includes routines of ascertaining costs by historical or conventional costing, standard costing or marginal costing.

Cost accounting is the classifying, recording and appropriate allocation of expenditure for the determination of the costs of products/services, and for the presentation of suitably arranged data for purposes of control and guidance of management. It includes the ascertainment of the cost of every order, job, contract, process, service or unit as may be appropriate.  It deals with the cost of production, selling and distribution.  It is thus the provision of such analysis and classification of expenditure as will enable the total cost of any particular unit of production or service to be ascertained with reasonable degree of accuracy and at the same time to disclose exactly how such total cost is constituted (i.e. the value of material used, the amount of labour and other expenses incurred) so as to control and reduce its cost.  According to Wheldon, “Cost Accounting is the application of accounting and costing principles, methods and techniques in the ascertainment of costs and the analysis of saving/or excess cost incurred as compared with previous experience or with standards”.  Thus, cost accounting relates to the collection, classification, ascertainment of cost and its accounting and control relating to the various elements of cost.  It establishes budgets and standard costs and actual cost of operations, processes, departments or products and the analysis of variances, profitability and society use of funds.

Cost Accountancy is the application of costing and cost accounting principles, methods and techniques to the science, art and practice of cost control and the ascertainment of profitability.  It includes the presentation of information derived there from for purposes of managerial decision making.  Thus, cost accountancy is the science, art and practice of a cost accountant.  It is science because it is a body of systematic knowledge having certain principles which a cost accountant should possess for proper discharge of his responsibilities.  It is an art as it requires the ability and skill with which a cost accountant is able to apply the principles of cost accountancy to various managerial problems.  Practice includes the continuous efforts of a cost accountant in the field of cost accountancy.  Such efforts also include the presentation of information for the purpose of managerial decision making and keeping statistical records.

Importance Of Cost Accounting

Importance Of Cost Accounting

The limitation of financial accounting has made the management to realize the importance of cost accounting. The importance of cost accounting is as follows:

• Importance to Management

  Cost accounting provides invaluable help to management. It is difficult to indicate where the work of cost accountant ends and managerial control begins. The advantages are as follows:

  • Helps in ascertainment of cost

    Cost accounting helps the management in the ascertainment of cost of process, product, Job, contract, activity, etc., by using different techniques such as Job costing and Process costing.

  • Aids in Price fixation

    By using demand and supply, activities of competitors, market condition to a great extent, also determine the price of product and cost to the producer does play an important role. The producer can take necessary help from his costing records.

  • Helps in Cost reduction

    Cost can be reduced in the long-run when cost reduction programmer and improved methods are tried to reduce costs.

  • Elimination of wastage

    As it is possible to know the cost of product at every stage, it becomes possible to check the forms of waste, such as time and expenses etc., are in the use of machine equipment and material.

  • Helps in identifying unprofitable activities

    With the help of cost accounting the unprofitable activities are identified, so that the necessary correct action may be taken.

  • Helps in checking the accuracy of financial account

    Cost accounting helps in checking the accuracy of financial account with the help of reconciliation of the profit as per financial accounts with the profit as per cost account.

  • Helps in fixing selling Prices It helps the management in fixing selling prices of product by providing detailed cost information.
    
• Importance to Employees

  Worker and employees have an interest in which they are employed. An efficient costing system benefits employees through incentives plan in their enterprise, etc. As a result both the productivity and earning capacity increases.
  

• Cost accounting and creditors

  Suppliers, investor’s financial institution and other moneylenders have a stake in the success of the business concern and therefore are benefited by installation of an efficient costing system. They can base their judgment about the profitability and prospects of the enterprise upon the studies and reports submitted by the cost accountant.

• Importance to National Economy

  An efficient costing system benefits national economy by stepping up the government revenue by achieving higher production. The overall economic developments of a country take place due to efficiency of production.

• Data Base for operating policy

  Cost Accounting offers a thoroughly analyzed cost data which forms the basis of formulating policy regarding day to day business.

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