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Costing and Cost Accounting

Updated on November 11, 2013

Costing and Cost Accounting.


Costing or cost accounting is a branch of accounting which 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 the fix the selling price.  In this complex and competitive market scenario, it is essential to determine the cost of products and services.  It also help the management to take an informed decision to reduce cost and increase the profit, reduce the manufacturing cost, whereby reducing the selling price.  To sustain in this competitive market, producers needs 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 which are used to determine the cost of products and services.  Whereas the term Cost Accounting refers 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, labour cost or other direct and indirect expenses.  The purpose of production or services is that to earn 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 incure $30 for material $ 20 for labor and $ 25 for other overheads.  The selling price fixed as $ 100.  The cost of the shirt is $ 75 (30+20+25) Profit is $ 25 (100-75). 

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

Costing provides the following benefits:


1. Fast Decisions: Costing help the management to take fast and informed decision on the basis of data provided by the Cost Accounting.

2. Optimum Profit: Costing help the organization to maximize the profit by exercising efficient control in personal, financial, production and marketing activities.

3. Maximum utilization of Limited Resources: By minimizing the wastage, once 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 attain by effectively utilizing the cost accounting.

5. Effective Management: In large manufacturing plants requires special attention in every stage and process of the manufacturing. Cost accounting help 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 many advantages, many companies are opting the help of costing to control the cost. It is now a widely recognized branch of accounting and generating employment for people who are specialized in Cost accounting. Costing helps in checking of wastage, pricing, control of resources, management of process, discharge of social obligations, flow of data for decision making and provides opportunity for profit growth in the organization.

Frequently arriving items in a cost sheet

Cost of Direct Material

Opening Stock of raw material
Add Purchase of raw material
Add: Carriage inwards

Less: Closing Stock

Direct Labour
Direct Expenses

PRIME COST (Total of all the above)


Factory Overheads


Office Salaries
Power/Fuel consumed
Other consumable stores
Indirect wages
Repairs of Machines/Plant
Depreciation of Plant & Machinery

Less: Amount received from sale of Scrap

FACTORY/WORKS COST
(Total of all the above + prime cost)

Office and administrative Overheads

Office Rent
Directors fees
Office salaries
General Charges

COST OF PRODUCTION
(Total of all the above + factory/works cost)

Selling and distribution overheads

Carriage outward
Advertisements
Sales department salaries
Traveling expenses

COST OF SALES (Total of all the above + cost of production)

Profit (Balancing figure)

Sales (Actual sales value of the product)

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