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

1
NATURE AND SCOPE OF COST ACCOUNTING
INTRODUCTION
In the modern business world, the nature and functioning of business organisations have
become very complicated. They have to serve the needs of variety of parties who are interested
in the functioning of the business. These parties constitute the owners, creditors, employees,
government agencies, tax authorities, prospective investors, and last but not the least the
management of the business. The business has to serve the needs of these different category
of people by way of supplying various information from time to time. In order to satisfy the
needs of all these group of people a sound organisation of accounting system is very essential.
In the ancient days the information required by those who were interested with a business
organisation was met by practising a system of accounting known as financial accounting
system. Financial accounting is mainly concerned with preparation of two important
statements, viz., income statement (or profit & loss account) and positional statement (or
Balance Sheet). This information served the needs of all those who are not directly associated
with management of business. Thus financial accounts are concerned with external reporting
as it provides information to external authorities. But management of every business
organisation is interested to know much more than the usual information supplied to outsiders.
In order to carry out its functions of planning, decision-making and control, it requires
additional cost data. The financial accounts to some extent fails to provide required cost
data to management and hence a new system of accounting which could 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 of the operations of a
business, using conventional double entry book-keeping techniques. It suffers from the
following limitations :
(i) It provides only past data : Financial accounts provide out of date information
to management. But management is interested in current data but not past data
as it does not serve any purpose to it. Therefore it has been rightly pointed out
that financial accounts provide only a post-mortem analysis of past activities.
(ii) It reveals only over all result of the business : Financial accounts does not
provide data for each and every product, process, department or operation
separately. Instead it provides the financial information in a summary form for
the entire organisation as a whole.
(iii) It is static in nature : Modern business is dynamic but not static. Financial
accounts does not incorporate the changes that take place within the business.
(iv) It fails to take into account the impact of price level change : In the modern
4 Cost Accounting and Financial Management
inflationary conditions the price level has significant impact over financial
statement. Under financial accounts, assets are shown at the actual or historical
cost. Consequently depreciation is also charged on actual or historical cost. This
under charging of depreciation will distort the profit figure.
(v) Possibility of manipulation of financial accounts : Very often financial accounts
are manipulated at the whims and fancies of management so as to project better
image in the minds of prospective investors. The chief forms of manipulating
the financial accounts assume the form of over or undervaluation of inventory,
excessive or inadequate provision for depreciation, creation of secret reserves,
etc.
(vi) It fails to exercise control over resources : Financial accounts fail to exercise
control over materials, labour and other expenses incurred in a business enterprise.
As a results, avoidable wastages and losses go unchecked under this 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 price is fixed. In the
absence of fixation of prices in advance, it is not possible to supply quotations to
the prospective customers. To that extent the income from such sales diminish.
(viii) It fails to provide adequate data for management in carrying out its functions :
Management of every organisation relies heavily on adequate cost data for
formulating policies and in decision-making process. But financial accounts
fails to provide such useful cost data to management.
(ix) It does not provide a basis for cost comparison : Financial accounts does not
help in cost comparison over a period of time or between two jobs or two
operations. Thus a basis for judging the efficiency of an year with past year or
worthfulness of two different jobs or operations cannot be appraised.
(x) It does not make use of control techniques : Financial accounts fail to make use
of certain important cost control techniques such as budgetary control and standard
costing. Thus financial accounts do not facilitate measuring the efficiency of the
business with the help of control techniques.
(xi) It fails to ascertain break-even point : Financial accounting does not help in
ascertaining the break-even point, i.e., the sale or output where the revenue
equals the cost. Hence, the point of no-profit-no-loss cannot be made out under
financial accounts.
To Ensure Optimum Utilisation of Resources
In todays business world, the resources available are very scarce. Hence every business
unit must strive hard to obtain maximum output with the available input. In order to ensure
the optimum utilisation of scarce resources, the value of input is measured against the value
of output. This implies matching cost per unit of production against the value of output or
selling price. But financial accounts does not provide the information relating to cost per
unit of production. Hence the need for cost accounting was felt necessary.
To Achieve Overall Efficiency of Business
Every businessman will make constant effort to improve his business. In order to
formulate suitable policy and sound decision, he has to know answers to certain questions
such as (a) What is the maximum profit which a business can make? (b) Is the profit earned
5
by it is more or less compared to the earlier years? (c) Which product 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 the selling price requires
revision? Cost accounting serves as an useful tool in the hands of management in this
direction. By analysing the cost of production of every unit, it helps 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 the fourteenth century. In the course of
its evolution it passed through following stages.
(1) In the first stage of its development, cost accounting was concerned only with
the three prime cost elements, viz., direct material cost, direct labour cost and
direct expenses. For recording the transactions relating to materials the important
documents used were (a) stores ledger, (b) a material requisition note, and (c)
materials received note. To account for labour cost, employee time card and
labour cost card were devised by Mr. Metcalfe. Later on a distinction between
manufacturing and non-manufacturing cost was made by Mr. Norton. Thus
material cost, labour cost and manufacturing cost constituted prime cost.
(2) Secondly, around the turn of the nineteenth century, the importance of nonmanufacturing
cost (overheads) was recognised as one of the distinct element of
cost. The method of charging non-manufacturing cost to the production cost was
devised under this stage.
(3) Thirdly, the techniques of estimation and standards are devised. Instead of using
actual cost, standard costs are used and by comparing with the actual 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 types of business
undertakings. The costing principles and techniques were also extended to
important functions of a business.
(5) In modern times the development of electronic data processing has occupied
significant stage in the growth of cost accounting system.
Cost Accounting in Indian Context
The application of cost accounting methods in Indian industries was felt from the
beginning of the twentieth century. The following factors have accelerated the system of
cost accounting in our country.
(a) Increased awareness of cost consciousness by Indian industrialists with a view
to ascertain costs more accurately for each product or job.
(b) Growing competition among manufacturers led to fixation of prices at a lower
level so as to attract more customers.
(c) Economic policy of government which laid emphasis on planned economy with
a view to achieve the targets led to cost reduction programmes by Indian
industrialists.
(d) Increased government control over pricing led the Indian manufacturers to give
utmost importance to the installation of cost accounts.
(e) The establishment of National Productivity Council in 1958 and the Statutory
Nature and Scope of Cost Accounting
6 Cost Accounting and Financial Management
Recognition of Institute of Cost and Works Accountants of India in 1959 gave
further encouragement to install cost accounting system in Indian industries.
DEFINITION AND SCOPE OR COST ACCOUNTANCY
The terminology of cost accountancy published by the Institute of Cost and Management
Accountants, London defines cost accountancy as "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
therefrom for the managerial decision-making."
On analysis of the above definition, the following features of cost accountancy become
evident :
(a) "Cost accountancy" is used in the broadest sense when compared to "cost
accounting" and "costing". This is so because cost accountancy is concerned
with the formulation of principles, methods and techniques to be applied for
ascertaining cost and profit.
(b) Having ascertained 'cost' and 'profit', cost accountancy is concerned with
presentation of information to management. To enable management to carry out
its functions, reports must be promptly made available at the right time, to the
right person and in a proper from.
(c) The information so provided is to serve the purpose of managerial decisionmaking
such as introducing a new line of product, replacement of manual labour
by machines, make or buy, decisions, etc.
SCOPE OF COST ACCOUNTANCY
The scope of any subject refers to the various areas of study included in that subject. As
regards the scope of cost accountancy is concerned, it has vast scope. 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 "the technique and process of
ascertaining the cost."
The above definition is very significant in as much as it carries the main theme of cost
accountancy. This definition emphasises two important aspects, viz.
(a) The technique and process of costing : The technique of costing involves two
distinct steps, namely, (i) collection and classification of costs according to
various elements and (ii) allocation and apportionment of the expenses which
cannot be directly charged to production. As a process, costing is concerned
with the routine ascertainment of cost with a formal procedure.
(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 Standard Cost. For achieving
the second step, costing has developed different methods such as single or
output costing. Job costing, contract costing, etc. Finally, for achieving the last
step costing has developed important techniques such as Absorption Costing,
Marginal Costing and Standard Costing.
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The three terms indicated as 'systems', 'methods', 'techniques' are independent factors
but co-exist together. Ascertainment of cost of production is based on all these three terms.
For example, continuous type of industries may use process costing as a method, using
actual cost as a system, under Standard Costing Technique.
2. Cost Accounting
Kohler in his dictionary for Accountants defines cost accounting as "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 of products or services, the
relation of these costs to sales values, and the ascertainment of profitability."
The above definitions reveal the following aspects of cost accounting :
(a) Cost classification : This refers to grouping of like items of cost into a common
group.
(b) Cost recording : This refers to posting of cost transactions into the various
ledger maintained under cost accounting system.
(c) Cost allocation : This refers to allotment of costs to various products or
departments.
(d) Cost determination or cost finding : This refers to the determination of the cost
of goods or services by informal procedure, i.e., procedures that do not carry on
the regular process of cost accounting on a continuous basis.
(e) Cost reporting : This refers to furnishing of cost data on a regular basis so as to
meet the requirements of management.
Differences between Cost Accountancy, Costing and Cost Accounting
Points of Cost Accountancy Costing Cost Accounting
Differences
(1) Scope Cost accountancy is broadest It is broader in It is narrow in its scope.
in its scope. its scope.
(2) Function It is concerned with formulation It is concerned with It is concerned with
of costing principles, methods, ascertainment of cost. recording of cost.
techniques to be adopted by
a business.
(3) Periodicity of It is a starting Point. It begins where cost It begins where costing
functioning accountancy ends. ends.
(4) Persons The persons involved are The person involved is The persons involved
involved experts in the field of cost accountant. are cost clerks.
cost accountancy such as
management accountant.
3. Cost Control
According to Kohler, cost control represents the employment of management devices
in the performance of any necessary operation so that pre-established objectives of quality,
quantity and time may be attained at the lowest possible outlay for 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 an undertaking." Acccording to this
definition, cost control aims at guiding the actuals towards the lines of target and regulates
the actuals if they deviate from the targets. This guidance and regulation is done by the
executive who is responsible for causing the deviation. This process will become clear by
enumerating the steps involved in any cost control technique.
(a) Fixation of targets in terms of cost and production performance.
(b) Ascertaining the actual cost and production performance.
(c) Comparison of actuals with the targets.
(d) Analysing the variance by causes and the person responsible for it.
(e) Taking remedial steps to set right unfavourable variations.
Cost control is exercised through a variety of techniques such as inventory control,
quality control, budgetary control, standard costing, etc. The advantages 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 by customers.
(c) It helps in competing successfully in the market.
(d) It increases the profit earning capacity of the business.
(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 actions expressed in financial terms.
According to him hudgeting process involves the preparation of a budget and its fullest use
not only as a devise for planning and co-ordinating but also for control."
5. Cost Audit
The terminology of ICMA, London, defines cost audit, as "the verification of the
correctness of cost accounts and of the adherence to the cost accounting plan.
NATURE OF COST ACCOUNTING
The nature of cost accounting can be brought out under the following headings :
1. Cost accounting is a branch of knowledge : Though considered as a branch of
financial accounts, cost accounting is one of the important branch of knowledge, i.e., a
discipline by itself. It is an organised body of knowledge consisting of its own principles,
concepts and conventions. These principles and rules of course vary from industry to industry.
2. Cost accounting is a science : Cost accounting is a science as it is a body of systematic
knowledge relating to not only cost accounting but relating to a wide 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 intimate knowledge of all these field of
study in order to carry on his day-to-day activities. But it is to 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 the sense it requires the
ability and skill on the part of cost accountant in applying the principles, methods and
techniques of cost accountancy to various management problems. These problems include
the ascertainment of cost, control of costs, ascertainment of profitability, etc.
9
4. Cost accounting is a profession : In recent years cost accounting 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 bodies such as National Association
of Accountants (NAA) in USA. The Institute of Cost and Management Accountants in UK,
the Institute of Cost and Works Accountants in India and such other professional bodies
both in developed and developing countries have increased the growing awareness of costing
profession among the people. Secondly, a large number of students have enrolled in these
institutes to obtain costing degrees and memberships for earning their 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 financial accounting. 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 respects they differ from one another.
These points of similarities and dissimilarities and enumerated below :
Points of Similarities
(a) The fundamental principles of double entry is applicable in both the systems of
accounts.
(b) The invoices and vouchers constitute the common basis for recording transactions
under both the systems of accounts.
(c) The results of business are revealed by both the systems of accounts.
(d) The causes for losses and wastages of a business are provided by both these
systems of accounts.
(e) The determination of future business policy is guided by both these systems of
accounts.
(f) A basis for comparison of expenses is being provided by both the accounting
systems.
(g) Accuracy of accounts is maintained under both the systems by means of exercising
check over errors and commissions which might creep in either of accounts.
Points of Dissimilarities
Points of Financial Accounts Cost Accounts
differences
1. Purpose The purpose of financial accounts is The purpose of cost accounting is internal
external reporting mainly to owners, reporting, i.e., to the management of every
creditors, tax authorities, government, business.
and prospective investors.
2. Obligation This is to be maintained compulsorily Cost accounts are maintained voluntarily.
to maintain by higher forms of business organisations. In some cases government has directed
accounts The preparation of accounts must be in some companies to maintain cost accounts
accordance with the statutory provisions. to improve efficiency.
(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 are incurred.
(b) In financial accounts expenses are (b) In cost accounts costs are expressed
recorded in totals. by proper analysis and classification
in order to find out out cost per unit.
(c) Financial accounts records all (c) Cost accounts records only those costs
transactions which takes place in the which affect production and sales.
business.
(d) Financial accounts records only (d) Cost accounts records both historical
historical costs. and estimated costs.
4. Analysis of Financial accounts disclose profit for Cost accounts show the profitability or
profit the entire business as a whole. otherwise of each product, process or
operation so as to reveal the areas of
profitability.
5. Control (a) It does not make use of any control (a) It makes use 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 exercises control over materials using
any technique. some techniques such as ABC analysis,
level setting, economic order quantity,
etc.
(c) Control over labour is not exercised. (c) Control over labour is exercised and
efforts are taken to minimise idle time,
over time etc.
6. Duration of Generally, financial accounts provides Cost accounting 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 cost data helps in evaluating the
of efficiency accounts is not sufficient to evaluate the efficiency of the businesses.
efficiency of the business.
8. Pricing It fails to guide the formulation of It provides adequate data for formulating
pricing policy. pricing policy.
9. Valuation Stock is valued at cost or market price Stock is always valued of cost price.
of stock whichever is less.
DIFFERENCES BETWEEN COST AND MANAGEMENT ACCOUNTING
The American Accounting Association 1958, committee on management accounting
defines management accounting as "the application of appropriate techniques and concepts
in processing the historical and projected economic data of an entity to assist management
in establishing a plan for reasonable economic objectives and in the making of rational
decisions with a view towards achieving these objectives." It includes the methods and
concepts necessary for effective planning for choosing among alternative business actions,
and for control through the evaluation and interpretation of performance. Its study involves
consideration of ways in which accounting information may be accumulated, synthesised,
analysed and presented in relation to specific problems, decisions and day-to-day tasks of
business management.
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The terminology published by ICMA, London, defines management accounting as
"the application of professional knowledge and skill in the preparation and presentation of
accounting information in such a way as to assist management in the formulation of policies
and in the planning and control of the operation of the undertaking."
If we examine the above two definitions of management accounting it 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 This system of accounting evolved in the
Accounting to fourteenth century. middle of 20th century. Hence it is of recent
origin where compared to cost accounting.
2. Object The main objects of cost accounts is to The main objective of management
ascertain and control cost. accounting is to provide useful information
to management for decision-making.
3. Basis of It is based on both present and future It is concerned purely with the transactions
recording transactions for cost ascertainment. relating to future.
4. Scope Cost accounts has narrow scope as it It has a wide scope in as much as it covers
covers matters relating to ascertainment the areas of financial accounts, cost
and control of cost. accounts, taxation, etc.
5. Utility Cost accounts serves the needs of both Management accounting serves the needs
internal management and external parties. of only internal management.
6. Types of It deals only with monetary transactions. It deals with 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 does not 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 the management.
RELATIONSHIP BETWEEN COST, ESTIMATE AND PRICE
The terms 'estimates', 'costs' and 'prices' are closely related to 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 accounts provide reliable data on the
basis of which future cost is estimated. However, an estimate is only 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 such guesswork must be as far
as possible closer to the facts.
Cost represents actual total cost incurred in manufacturing a product or in completing
a job. The total cost of manufacturing a product broadly consists of material, labour and
other expenses. The true cost is ascertained either at the various stages of completing the
production or at the end of completion of the job. The current cost serves as the basis for
future estimates. Thus cost is considered as a fact as it represents the actual or true cost of
manufacturing a product or completing the job.
Price in costing refers to selling price of a product. Selling price 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 the product, tastes and preferences
of customers, price of competitive products, future trends of prices and so on. So price
fixing is regarded as a matter of policy. Hence it has been popularly 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 are considered to be most
important.
1. Ascertainment of cost : This was considered to be the primary objective of cost
accounting in the initial stages of its development. However, in modern times this has assumed
the secondary objective of cost accounting. Cost ascertainment involves the collection and
classification of expenses at the first instance. Those items of expenses 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 on some suitable basis. Thus the
cost of production of goods manufactured is ascertained. In this process, cost accounts
involves maintenance of different books to record various elements of cost. Cost of production
is ascertained by using any of the costing technique such as historical costing, marginal
costing, etc.
2. Cost control : At one time cost control was considered as secondary objective of
cost accounts. But in modern times it constitutes the primary purpose because of its utmost
importance in all business undertakings. Cost control is exercised at different stages in a
factory, viz., acquisition of materials, recruiting and deployment of labour force, during the
production process and so on. As such we have material cost control, labour cost control,
production control, quality control and so on. However, control over cost is exercised through
the techniques of budgetary control and standard costing. The control techniques enable the
management in knowing the operating efficiency of a business.
3. Determination of selling price : Every business organisation aims at maximising
profit. Total cost of production constitutes the basis on which selling price is fixed by
adding a margin of profit. Cost accounting furnishes both the total cost of production as
well as cost incurred at each and every stage of production. No doubt other factors are taken
into consideration before fixing price such as market conditions the area of distribution,
volume of sales, etc. But cost plays the dominating role in price fixation.
4. Frequent preparation of accounts and other reports : The management of every
business constantly rely upon the reports on cost data in order to 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 stock value is available only at the
end of the year. But cost accounts provide the value of closing stock at frequent intervals by
adopting a "continuous stock verification" system. Using the value of closing stock it is
possible to prepare final accounts and know the operating results of the business.
5. To provide a basis for operating policy : Cost data to a great 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 important role in decision-making.
Therefore availability of cost data is a must for all levels of management. Some of
the decisions which are based on cost are (a) make or buy decision, (b) manufacturing
by mechanisation or automation, (c) whether to close or continue operations in spite of
losses.
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FUNCTIONS OF COST ACCOUNTANT
The functions of cost accountant may be enumerated under the following :
Traditional Functions
The traditional functions comprise of the routine functions of cost 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 both in terms of total and
per unit of product.
(c) To design suitable system for defining responsibilities and controlling cost.
(d) To provide necessary data to enable management in fixing the price.
(e) To prepare reports on wastages of material, loss of labour time, idle capacity of
machines so as to improve profitability of business.
(f) To implement cost control techniques such as budgetary control and standard
costing.
(g) To prepare cost schedules to assist management in making decisions and in
formulating policies.
(h) To design suitable forms for organising an effective system of reporting which
ensures provision of adequate cost data to all levels of management.
(i) To assist management in the valuation of closing stock of raw materials and
work-in-progress so that too much of capital is not locked up in unnecessary
inventories.
(j) To prepare periodical cost statements and profit and loss account.
Modern Functions
In recent times the functions of a cost accountant are not only confined to ascertain and
control cost but extend far beyond these functions. This is on account of the additional
responsibilities arising from the various branches of accounting, 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 of accounting.
(iii) To work in close co-ordination with various departmental managers so as to
implement cost reduction programmes and methods of improvement.
(iv) To undertake cost audit programmes as per the directives issued by the
government and the provisions of the Indian Companies Act of 1956.
As regards the role of cost accountant in an industry, in has been beautifully summarised
by Mr. Wilmot in his article on "the cost accountant's place in management". According to
him, the role of cost accountant is "that of a historian, news agent, and prophet". As historian
he must be meticulously accurate, i.e., while supplying cost information 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 the needy person. As a prophet he
must combine knowledge and experience with foresight and courage.
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 cost accounting system cannot be
installed for all types of business undertakings. The cost accounting system depends upon
the nature of business and the product manufactured. Before a suitable system of cost
accounting is installed it is necessary to undertake a preliminary investigation so as to know
the feasibility of installing cost accounting system to such business. While introducing a
system of cost accounts it should be borne in mind that cost accounting system must suit the
business. There should not be any attempt to make the business suit the system. One more
consideration that is of practical importance is that the benefits derived from cost accounting
system must be more than the investment made on it. This means the 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 the successful 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 set up.
(c) The existence of sound basis for collection of all indirect expenses and a basis
for its apportionment to various production departments.
(d) The integration of cost and financial accounts to facilitate reconciliation of
profit as shown by these two systems of accounts.
(e) The use of printed forms so as to facilitate quick compilation of cost reports.
(f) The duties and responsibilities of cost accountant must be made clear.
Factors to be Considered before Installing a Cost Accounting System
The following factors are to be considered before installing a cost accounting system :
1. History of business unit : The history of a business unit implies the duration of its
existence, position in the industry, the rate of growth, policy and philosophy of management
and the like. The history of business unit serves as the basis for designing the cost accounts
in respect of necessity, simplicity, and investment involved in installing cost accounts.
2. Nature of the industry : The nature of business such as manufacturing, 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 be employed. In other words,
there is no all purpose technique and method of costing that can be applied universally.
3. Product range : The range of products manufactured and sold also determine the
method of costing to be selected. Accordingly range of products must be analysed in terms
of size, models, fashions, area of market, competitors and whether the products are made to
customers specification or for stocking and selling.
4. Technical considerations : Technical considerations that influence the installation
of cost accounts are as follows :
(a) Size and layout of the factory
(b) The existence of production and service departments
(c) Flow of production
(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.
15
5. Organisational factors : The problem of installing cost accounting is somewhat
difficult in case of an existing business when compared to new business. However, the
existing set up of the organisation should be least disturbed should the need arise. In order
to fix up responsibility to the executives it may be necessary to group the departments. The
organisational factors to be considered are : (a) size and the type 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 and decentralisation, (e) extent of departmentation,
(f) availability of modern office equipments, and (g) number of managerial and supervisory
staff.
6. Selling and distribution method : The chief factors to be considered with regard to
distribution process are the warehousing facilities, external transport, market research and
other promotional measures, terms of sale and procurement of orders from customers.
7. Accounting aspects : The factors to be considered in respect of accounting are : (a)
number of financial records, (b) existing forms, (c) registers used, and (d) number of copies
required.
8. Area of control to be exercised : The areas where cost control is to be exercised is
to be identified so that each manager may take action relevant to his activities. If material
control occupies significant area of control, it must be given topmost priority for exercising
control over materials.
9. Reporting : The cost accounting system to be installed must ensure 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 should be reported.
10. Uniformity : The practice of adopting uniform costing facilitates 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 company has number of
subsidiaries.
11. Use of electronic data processing : In modern days it has become a common
practice to use electronic data processing equipments and computers. In this situation it is
essential to ensure that the equipment meets the needs of the system but not the other way
round.
12. Practical considerations : The cost accounting system to be installed must be
flexible in operation and must be capable of adaptation to changing conditions. The system
must be periodically scrutinised so as to make necessary changes owing to development in
business.
Practical Difficulties in Installing Cost Accounting
In addition to the above problems, a cost accountant will encounter the following
practical difficulties at the time of installation of cost accounting system :
1. Lack of support from management : Wherever costing system is installed. It is
essential to seek the support of various departmental managers. Very often the managers
show hostile attitude towards the costing system. They feel that this system will interfere in
their routine work and probably as a means of checking their efficiency. Under such
circumstances it is better to convince them about the utility of costing 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 the existing accounting staff
resist the installation of the cost accounting system on two grounds. 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 encouraging them about the usefulness
of cost accounting as a supplement to financial accounts and the generation of more
employment opportunities from the installation of cost accounting system.
3. Non-cooperation from middle and bottom level management : At times the middle
and bottom level managers such as foremen, supervisors and inspectors also fail to extend
their wholehearted cooperation fearing additional work which may be entrusted to them.
This problem may be overcome by suggesting them about the simplicity of the system and
the existence of a separate cost accounting department to look after costing matters. However,
they may be required to provide necessary reports concerning their area of activity so as to
enable functioning of cost accounting department efficiently.
4. Lack of trained staff : This was no doubt a problem in olden days. Today this
problem is overcome, thanks to the establishment of The Institute of Cost and Works
Accountant of India in our country which offers professional course in costing and also
offers training facilities through various companies to the candidates undergoing the course.
In spite of this facility, it is somewhat difficult to get the competent and experienced staff at
the time of installation. This problem can be overcome by paying attractive salaries to the
cost accountants.
5. Heavy expenses in installing and maintaining the system : The setting up of a
separate costing department with staff often poses a problem. In addition 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, as was 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 accounting system :
1. Accuracy : The system of cost accounting must provide for accuracy in terms of
both cost ascertainment and presentation. Otherwise it will prove to be misleading.
2. Simplicity : Cost accounting system involves detailed analysis of cost. To avoid
complications in the procedure of cost ascertainment an elaborate system of costing should
be avoided and every care must be taken to keep it as simple as possible.
3. Elasticity : The cost accounting system should be capable of adopting itself to the
changing situations of business. It must be capable of expansion or 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 in installing it.
5. Comparability : The records to be maintained must facilitate comparison over a
period of time. The past records must serve as a basis to guide the future.
6. Promptness : An ideal costing system is one which provides cost data in an analytical
form to the management. So all the departments of a factory must analyse and record the
relevant items of cost promptly in order to furnish cost information on a regular basis to
various levels of management. This helps in checking up the progress of the business on a
regular basis.
17
7. Periodical preparation of accounts : With a view to facilitate the comparison of
results frequently, it is desirable to prepare accounts periodically. Constant comparison of
actual result with standard result enables to spot out areas of inefficiency. This can be set
right by taking remedial measures.
8. Reconciliation with financial accounts : The system of cost accounts must be
capable of reconciling with financial accounts so as to check accuracy of both the system of
accounts.
9. Uniformity : The various forms and documents used under costing system must be
uniform in size and quality of paper. Printed forms must be used to avoid delay in the
preparation of reports. This also reduces the burden of clerical staff. Forms of different
colours can be used to distinguish different documents.
10. Equity : The basis of apportioning indirect expenses to products, departments or
jobs must be fair and equitable.
ORGANISATION OF COST ACCOUNTING DEPARTMENT
The organisation of cost accounting department depends upon the size of the concern.
Whatever may be the structure of cost accounting department in a factory, it is established
to serve the following purposes : (i) To compile cost data in order to meet the statutory
requirement wherever applicable, (ii) To provide necessary cost data to management to
carry out its functions efficiently, and (iii) To ensure efficiency and economy in the
functioning of cost accounting department. To achieve the above purposes cost accounting
department usually performs the following functions :
(1) Designing and installation of appropriate method of costing.
(2) Accumulation of cost data by process, department and product.
(3) Analysis of such cost by elements of cost.
(4) Estimation of cost of production.
(5) Reporting of cost information to all levels of management.
(6) Advising management in relation to investment based on cost information.
In a small and medium-sized concern, the cost accounting department may be set up as
a section of financial accounting system. The cost accountant who is incharge of cost
accounting department may be authorised to report to the chief accountant. In large-sized
concern, a separate cost accounting department is established under the supervision of a
full-fledged cost accountant. The cost accounting department is equipped with sufficient
staff each to look after different facets of cost accounting function. While important functions
such as budgeting, cost analysis, etc. are performed by cost accountant, cost recording, cost
reporting and such other functions are performed by cost clerks.
The cost accounting department may be organised either on the principle of centralisation
or decentralisation. Under centralised system, the functions of cost accounting departments
relating to all firms belonging to same industry is performed at a common central place.
The extent of centralisation of cost accounting department depends upon the following
factors :
(a) The philosophy of management regarding divisional responsibility.
(b) The ready availability of cost data from each firm.
(c) Size of the 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 costing staff.
2. It permits mechanisation of accounting which is not possible under decentralisation
system.
3. It reduces paper work and economise stationery costs.
4. It facilitates prompt reporting.
Under decentralisation system a separate cost accounting department is set up for each
and every firm under the supervision of a competent cost accountant. This system has certain
advantages.
(a) It tends to increase the initiative of the cost accountants of every firm as the
responsibility to control lies in their hands.
(b) It eliminates duplication of recording and reporting.
(c) It increases the speed of functioning of cost accounting department.
Relationship of Cost Department to Other Departments
1. Cost accounting department and production department : It can well be said that
production department and cost department are interwoven together as the former cannot
function efficiently without the existence of the latter. The production 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 for manufacturing a product. It
also helps in controlling these costs so as to minimise the cost or production. In fact, the
main objective of cost accounting system is to reduce the cost of production of goods or
services manufactured and rendered by business units. The other areas where cost accounting
department is helpful in manufacturing process are : (a) Engineering department which is
concerned with designing a product, (b) Research and development department which is
concerned with development of a new product, (c) Production planning and control
department which ensures completion of production within the time schedule, and (d) Quality
control section, which ensures quality of products. All these departments heavily rely on
cost accounting department because costs to be incurred in these departments have a direct
impact over the functioning of these departments.
2. Cost accounting department and personnel department : The personnel
department which is concerned with proper recruitment, selection, training, time-keeping,
fixation of wage rate and preparation of payroll, will work with close co-ordination of cost
department. Each and every function performed by personnel department is again influenced
by additional cost to be incurred on such function as for example promotion of employees
leads to incurrence of additional wages.
3. Cost accounting department and finance department : The finance department is
concerned with receiving and disbursement of cash. The allocation of investments on fixed
and working capital entirely depends upon the cost reports submitted to it by the cost
department. Judicious utilisation of available capital is possible only when priority is given
for more important areas of investment. This is facilitated by furnishing prompt report by
cost department.
4. Cost accounting department and purchase department : In majority 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 low price. Any purchase of
19
substandard quality of materials will lead to dissatisfaction among customers and
consequently it leads to loss of orders. Further, purchase of materials at high rate will increase
the cost of production tremendously. Delay in getting supplies of materials lead to delay in
executing customers orders. In these respects cost accounting department can assist purchase
department to ensure efficient purchasing. Cost department also help in reducing (a) waste
of materials, (b) the risk from theft, and (c) excessive investment in inventories.
5. Cost accounting department and marketing department : Marketing department
relies on cost information in order to (a) estimate future product cost for fixing the selling
price, (b) in knowing the expenses incurred in marketing the products so that if the amount
exceeds the target, control measures can be taken to reduce such expenses, (c) to consider
alternative selling methods and promotional measures, and (d) to make further investment
in warehousing and distribution process. Cost department provides all such information as
is required by the marketing department for its efficient functioning.
6. Cost accounting department and financial accounting department : The existence
of cost accounting department makes the financial accounting department a complete
organisation by furnishing additional cost data to the chief accountant. Cost department
enable financial accounts department in carrying out the latter's function furnishing necessary
data in respect of the following :
(a) Supply of material cost, labour cost and expenses to facilitate preparation of
manufacturing account.
(b) Provision of the value of closing stock frequently to facilitate the preparation of
interim final accounts.
(c) Assist financial accounting department in matters relating to taxation, insurance
and in solving legal matters.
(d) Enables financial accounting department to settle the bills by 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 of people. The advantages of
cost accounting are discussed below.
Advantages of Cost Accounting to Management
1. Fixation of responsibility : Whenever a cost centre is established, it implies
establishing a kind of relationship between superior and subordinates. Thus responsibilities
are fixed on every individual who is concerned with incurrence of cost.
2. Measures economic performance : By applying cost control techniques such as
budgetary control and standard costing it helps in assisting the performance of business.
3. Fixation of price : By providing cost data it helps management to fix the selling
price in advance. Hence, quotations can be supplied to prospective customers to secure
orders.
4. Aids in decision-making : It helps management in making suitable decisions such
as make or buy, replace manual labour by machines, shut down or continue operations
based on cost reports.
5. Helps in the preparation of interim final accounts : By the process of continuous
stock taking it enables to know the value of closing stock of materials 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 accounting system enables to locate
the losses relating to materials, idle time and under utilisation of plant and machinery.
7. Facilitates comparison : It facilitates cost comparison in respect of jobs, process,
departments and also between two periods. This reveals the efficiency or otherwise of each
job process or department.
8. Assists in increasing profitability : Costing reports provide information about
profitable or unprofitable areas of operation. The management can discontinue that product
line or that department which are responsible for incurring losses. Thereby only profitable
line of activities alone are retained.
9. Reconciliation with financial accounts : A well maintained cost accounting system
facilitates reconciliation with financial accounts to check the arithmetical accuracy of both
the systems.
10. It guides future production policy : Cost data help management in determining
future production policy. Any expansion or contraction of production for the future is based
on past cost data.
Advantages to Employees
1. Cost accounting system enables employees to earn better wages through overtime
wages and incentive systems of wage payment.
2. By providing better facilities it ensures job security to employees.
3. Employees benefit by merit rating techniques which is conducted by scientific process.
Advantages to Creditors
1. It increases the confidence of creditors in the capital employed in the business.
2. The frequent preparation of reports and statements help in knowing 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 tax of the business.
3. Costing information helps in preparing national plans.
Advantages to Society
1. Cost reduction and cost control programmes go to minimise cost of production of
goods and services. A portion of the reduced cost of production is shared by customers by
paying less price for goods and services.
2. It offers employment opportunities in the cost accounting department in the capacity
of cost accountants and cost clerks.
LIMITATIONS OF COST ACCOUNTING
1. It is expensive : The system of cost accounting involves additional expenditure to
be incurred in installing and maintaining it. However, before installing it, care must be
taken to ensure that the benefits derived is more than the investment made on this system of
accounting.
2. The system is more complex : As the cost accounting system involve number of
steps in ascertaining cost such as collection and classification of expenses, allocation and
21
apportionment of expenses, it is considered to be complicated system of accounts. Moreover
the system makes use of several documents and forms in preparing the reports. This will
tend to delay in the preparation of accounts.
3. Inapplicability of same costing method and technique : All business enterprises
cannot make use of a single method and technique of costing. It all depends upon the nature
of business and type of product manufactured by it. If a wrong technique and method is
used, it misleads the results of business.
4. Not suitable for small scale units : A cost accounting system is 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 get distorted owing to the use of
notional cost such as standard cost, estimated cost, etc.
6. It lacks social accounting : Cost accounting fails to take into account the social
obligation of the business. In other words, social accounting is outside the purview of cost
accounts.
CRITICISMS OR OBJECTIONS LEVELLED AGAINST COST ACCOUNTS
Despite several benefits offered by cost accounts, critics have levelled the following
criticisms against it :
1. Cost accounting is merely a system of estimates and probabilities : Though the
main purpose of cost accounting is to ascertain the cost of production with a reasonable
degree of accuracy, yet absolute accuracy is not possible owing to the two reasons.
(a) Indirect expenditures are absorbed on the basis of predetermined rates instead of actual
rates, and (b) The material cost and labour cost is inflated so as to cover the normal loss and
wastage of materials and normal idle time of workers.
2. Cost accounting is unnecessary in such business enterprises which make large
profit : It is argued that industries which earn large amount of profit need not have a system
of cost accounting. This statement is absolutely wrong. Earning of more profit by industry
does not necessarily mean that its cost of production is lowest and there is no scope for
further reduction in the cost. Profit represents the difference between the selling price and
the cost of a product. Profit earned by a business may be high because of increased price
prevailing in the market. Two or more than two products manufactured by business may
earn profit for one line of product and loss by other. The profit earned by one product may
outweigh the loss suffered by other product thus resulting in overall profit. So it is wrong to
judge the efficiency of the business on the basis of overall profitability of the business. If
necessary steps are taken to reduce or eliminate losses suffered by a second line product,
the industry would earn more amount of profit. It is in this context that a system of costing
is felt.
3. It is unnecessary : This criticism is levelled owing to lack of understanding of the
objectives and advantages of costing. In the present-day competitive world, every
manufacturer must know the cost of production for each article so that he can fix selling
price on a reliable and reasonable basis. Further he can also compare his selling price thus
fixed with the price prevailing in the market. Cost ascertainment 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 the benefits derived from this
system is not commensurate with the investment made on it. But by carefully designing the
system so as to suit the business, the criticism can be nullified.
5. Competition governs price and hence there is no need for costing system : Some
critics contend that in these days of competition prices are determined by the forces of
demand and supply as against fixation of selling price by adding a desired margin of profit
on the cost price. This argument is incorrect. Even in this situation cost accounts disclose
the margin of profit that is earned by comparing the market price and cost of production. It
impresses upon management the need to reduce cost by increasing the volume of production
or by elimination of losses and wastages if any. If the cost price tend to be higher than the
market price, it is desirable to abandon such product line and pay attention to profitable line
of products.
6. There is no need for costing where production efficiency is high : The statement
is misleading as without a yardstick to measure the efficiency it is not possible to appraise
the efficiency of a business. Cost accounting system offers number of techniques such as
standard costing, budgetary control, inter-firm comparison and so on. The cost of production
can also be compared between two periods of time to know whether business is currently
running efficiently when compared to previous year. In case of inefficient operation remedial
measures can be taken to improve the business.
7. Other objections : Some other objections that are raised against the installation of
cost accounting system are follows :
(a) It is a mere matter of forms and rulings : Often it is argued that the cost accounting
system degenerates into a matter of mere forms and rulings. This is 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 simplified and altered to meet the
changing condition.
(b) Failure in many cases : The system of cost accounting is often condemned as
defective inasmuch as it has failed to produce the desired result. The defect does not lie in
the costing system but for some other reasons such as indifferent attitude of the management,
lack of adequate facilities, non-cooperations or opposition from employees. These defects
can be overcome by reversing the above trend.
(c) For want of necessity : It is contended by some that costing is of recent origin and
that its application was not felf in the past. Though it was not used earlier, still many industries
prospered. So it is felt by some critics that the installation of costing involves unnecessary
expenditure. However it is to be remembered that todays business functions in a competitive
conditions and every manufacturer must know the actual cost of production in order to
reduce the selling price. Many industrial failures in the past may be attributed to the lack of
knowledge on the part of management relating to the actual cost of production thereby
selling product below cost.
QUESTIONS
I. A. Indicate whether the following statements are True or False
1. Cost accounting is not needed for a non-profit organisation such as a club. T/F
2. If management is not interested in costing information, there should be no costing department. T/F
3. The cost accounting system is designed in such a way the flow of costs parallel the physical movement
of products. T/F
23
4. Effective control of cost can be secured only if the responsibility for cost incurrence is
clearly defined. T/F
5. Installation of a suitable system of cost accounting is restricted 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 with the same basic documents. T/F
8. Since pricing is a matter of management policy cost information is useless for price fixation. T/F
9. A concern that has been quite prosperous needs no costing system. 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 cost planning
(a) cost unit (b) direct cost
(c) cost statement (d) budgeting
2. Cost accounting concepts include all the following except
(a) planning (b) profit sharing
(c) controlling (d) product costing
3. The principal factor to be considered in designing a cost system include
(a) company organisation structure (b) nature of business
(c) manufacturing process (d) all of the above
4. The chief objective of cost accounting is to
(a) earn more profit (b) increase production
(c) provide information for management for planning and control (d) fix the prices
5. Cost accounting is
(a) nothing more than a detailed analysis of expenditure
(b) an instrument of management control
(c) useful only in such organisation as have profit as the aim
(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 the sales
(c) increasing the production (d) solving labour problem
7. The primary objective of cost accounting in modern time is
(a) cost ascertainment (b) cost control
(c) ascertainment of profit (d) preparation of reports
8. The purpose of financial accounting is to provide information for
(a) fixing prices
(b) recording expenses
(c) locating factors leading to wastage and losses
(d) assessing the profitability and financial position of the firm
9. Which one of the following is not a factor to be considered in designing a cost system
(a) price factor (b) organisational factor
(c) economy factor (d) reporting factor
10. Cost accounting differs from financial accounting in respect of
(a) recording cost (b) ascertaining cost
(c) control of cost (d) reporting of 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 of profit of business
3. Cost accounting was evolved (c) is expensive
4. Financial accounting is concerned with (d) find the actual cost of product
5. Cost accounting is concerned with (e) factual financial information
[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., April 2000)
2. Distinguish between costing and cost accounting. (Bangalore University, M. Com., 1998)
3. Mention any two uses of cost accounting system to management.
(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. (Sri Krishnadevaraya University, B. Com., March 1997)
6. State any four items which are not included in cost accounts.(Bangalore University, B. Com., April 1995)
7. Mention steps that you should take to instal cost accounting.
(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? (Osmania University, B. Com., October 1996)
SECTION-B
SHORT ANSWER QUESTIONS
1. "Cost accounting is becoming more and more relevant in the emerging economic scenario in India."
comment. (C.S. Intermediate, June 2000)
2. "Cost accounting system that simply records costs for the purpose 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 one indispensable to the intelligent and economical
management of a factory"-Discuss. (C.S. Intermediate, June 1998)
5. State the steps involved in the installation of a costing system 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 postmortem examination, 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 cost accounts.
(Bharathidasan University, B. Com., April 1998)
8. What are the main characteristics of an ideal cost accounting system?
(M.G. University, B. Com., September 1994)
9. What is costing? What are its objectives? (Calcutta University, B. Com., October 1997)
10. Describe the pre-requisites for the installation of cost accounting 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 what respects does cost accounting differ from
financial accounting? (Mangalore University, B. Com., October 1996)
13. Distinguish between cost ertimation and cost ascertainment. (University of Kerala, B. Com., April 1996)
14. State the advantages of cost accounting. (Bangalore University, B. Com., November 1992)
SECTION-C
LONG ANSWER QUESTIONS
1. State the objectives of cost accounting briefly explain the advantages of cost accounting.
(University of Mysore, B. Com., April 1998)
2. Define "Costing", "Cost" and "Cost Accountancy". Distinguish between cost accounting and financial
accounting. (University of Mysore, B. Com., April 2000)
3. "A Good system of costing must place the same emphasise on cost 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 and cost 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-natal care, but financial accounting is just a postmortem
examination". Critically examine this statement. (University of Mysore, B. Com., October 1996)
25
6. What one the limitations of financial accounting? How do you overcome 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
circumstances. (University of Mysore, B. Com., November 1998)
8. State the advantages of costing. How it aids the management and what objections are raised against cost
accounts? (University of Mysore, B. Com., November 91)
9. Define costing. Discuss briefly the objectives and advantages of costing.
(S. V. University, B. Com., April 1998)
10. Define cost accounting and bring out the differences between cost accounts and Financial accounts.
(Madurai Kamaraj University, B. Com., April 1998)
11. Define costing critically evaluate the arguments for the installation of costing system in an industry.
(Mangalore University, B. Com., April 1998)
12. What one the objectives of cost accounting? What are its advantages 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 manufacturing concern.
(Sri Krishnadevaraya University, M. Com., April 1998)
14. What are the objectives of cost accounting and what is the relation with Management accounting
department? (S. V. University, B. Com., September 1995)
15. "Cost accounting has become an essential tool of modern management". comment.
(Mangalore University, B. Com., April 1994)
16. Explain briefly the objects advantages and limitations of costing.
(Sri Krishnadevaraya University, B. Com., April 1994)
17. Define cost accounting. How does a good system of cost accounting serve the management.
(Bharathidasan University, B. Com., April 1994)
18. Discuss the limitations of financial accounting and explain the importance of cost accounting.
(M.G. University, B. Com., April 1996)
19. "An efficient system of costing is essential factor for industrial control under modern conditions of
business and as such may be regarded as an important part in the efforts of any management to secure
business stability"-Elaborate. (Mangalore University, B. Com., September 1997)
20. What is meant by cost accounting? Discuss in detail the advantages of the cost accounting.
(Madurai Kamaraj University, B. Com., April 1997)
21. What do you mean by installation of costing system? Explain the practical difficulties involved in
installing such a system in a manufacturing concern. (Osmania University, B. Com., October 1996)
22. Explain the advantages of cost accounting. What are the differences 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., May 1996)
25. What is cost accounting? What are its objectives? Discuss.
(Mangalore University, B. Com., October 1995)
26. "Cost accounting has become an essential tool of management". Comment and state the steps to be
taken while installing a costing system in a manufacturing concern.
(Bangalore University, M. Com., May 1995)
27. Explain the advantages of cost accounting. (University of Kerala, M. Com., May 1995)
28. Explain the significance of cost accounting in a manufacturing company.
(Sri Krishnadevaraya University, M. Com., April 1995)
Nature and Scope of Cost Accounting
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