Costing and Cost Accounting.

 

Costing and Cost Accounting.

Costing or cost accounting represents a branch of accounting that deals with recording classifying and appropriate allocation of expenditure to determine the cost of product and services. After determining the cost one can fix the profit margin and also fix the selling price. In this complex and competitive market scenario, it is essential to determine the cost of products and services. It also helps the management to take an informed decision to reduce costs and increase the profit, reduce the manufacturing cost, thereby reducing the selling price. To sustain in this competitive market, producers need to reduce the selling price and increase the quality.

Definition of Costing.

According to Harold J Wheldon "Costing is the classifying, recording and appropriate allocation of expenditure for the determination of the costs of products or services; and for the presentation suitably of arranged data for purposes of control and guidance of management."

The term "Costing" and "Cost Accounting" are used interchangeably. However, Costing refers to the technique and process of ascertaining costs. There are specified rules and principles used to determine the cost of products and services. Whereas the term Cost Accounting refers to the process of finding out the cost.

According to the Institute of Cost and Management Account "Cost accounting is that part of management accounting which establishes budgets and standard costs and actual costs of operations, processes, departments or products and the analysis of variances, profitability or social use of funds."

Use of Costing

Every economic activity such as production and services involves some expenses. These expenses may be of raw materials, labor costs, or other direct and indirect expenses. The purpose of production or services is to earn a profit. Cost accounting serves the purpose of identifying the expenses and cost and the profit margin of the product. For example, a cloth factory launches a new shirt. It has to incur $30 for materials $ 20 for labor and $ 25 for other overheads. The selling price is fixed at $ 100. The cost of the shirt is $ 75 (30+20+25) Profit is $ 25 (100-75).

Every manufacturer requires such information for planning, decision making, and cost control. Most of the time it is challenging to extract such information from financial accounting. A modern system of accounting is developed to cater to the requirement of the management to control the cost. Various limitations and deficiencies of financial accounting gave rise to the need for cost accounting.

Benefits of Costing

Costing provides the following benefits:

1. Fast Decisions: Costing helps the management to take a fast and informed decision based on data provided by the Cost Accounting.
2. Optimum Profit: Costing helps the organization to maximize the profit by exercising efficient control in the personal, financial, production, and marketing activities.
3. Maximum Utilization of Limited Resources: By minimizing the wastage, one can minimize the wastage and maximize the utilization of resources.
4. Maintain Social Responsibility: Social responsibility in terms of regular supply, reasonable price, proper quality can be attained by effectively utilizing the cost accounting.
5. Effective Management: In large manufacturing plants requires special attention in every stage and process of manufacturing. Cost accounting helps the management to easily control every stage of the manufacturing process efficiently. It'll help the management to identify the inefficient department or process and address the issue and correct it.
6. Help the Organization Globally Competitive: In this ever-changing global market, stringent control over costs can help the organization to compete globally with other manufactures/markets.

Due to the numerous advantages, many companies are opting for the help of costing to control the cost. It is now a widely recognized branch of accounting and generating employment for people specialized in Cost accounting. Costing helps in checking wastage, pricing, control of resources, management of the process, the discharge of social obligations, the flow of data for decision making, and provides an opportunity for profit growth in the organization.

Items in a Cost Sheet

Some of the items that are frequently arriving in a cost sheet related to cost of direct materiel are: opening stock of raw material, add purchase of raw material, add: carriage inwards, less: closing stock, direct labor, direct expenses, prime cost (total of all the above)

Some of the items that are frequently arriving in a cost sheet related to factory overheads are: office salaries, power/fuel consumed, other consumable stores, indirect wages, repairs of machines/plant, depreciation of plant & machinery, less: amount received from the sale of scrap, factory/works cost (total of all the above + prime cost)

Some of the items that are frequently arriving in a cost sheet related to office and administrative overheads are: office rent, directors fees, office salaries, general charges, cost of production (total of all the above + factory/works cost)

Some of the items that are frequently arriving in a cost sheet related to selling and distribution overheads are: carriage outward, advertisements, sales department salaries, traveling expenses, cost of sales (total of all the above + cost of production)

Last items that are frequently arriving in a cost sheet are profit (balancing figure) and sales (actual sales value of the product)