Professional Documents
Culture Documents
Limitation of FA
i. It provides only part data: FA provides out of data information to management.
The management is more interested in current data than part data. It is rightly
said that financial accounts provides only postmortem analysis of part activities
ii. it reveals only over all result for the business: fa 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 whole
organization
iii. it is stasis in nature: modern business is dynamic but financial accounts do not
incorporate the changes a that takes place within the business
iv. it fails to take into account the impact of price level changes : under fa asset
are shown at the actual or the historical cost consequently deprecation is also
charged on the actual cost their will distort the profit. In modern inflationary
condition the price level have significant impact over the financial statement
v. it fails to exercise control over resources ie labor material and other expenses,
as a result losses and wastage go uncheck under this system
vi. it does not provide basis for cost comparison , cost comparison over a period
of time are between 2 jobs or 2 operations is not feasible
vii. it fails to ascertain break even point ie the sales or output where the revenue
equals the cost
viii. possibility of manipulation of fa the chief form of manipulation fa are in the
area of valuation of inventory, provision of deprecation , creation of secretes
reserves
Cost: cost is the amount of resources given up in exchange for some goods or
services. Resources given up are money money’s equalient expressed in monitory
unit.
Cost unit: ascertainment of cost is the central activity of the ca the ascertainment of
the cost necessities the determination of unit in terms of which cost can be
ascertained and expressed
The unit of product or service in relation to which cost are ascertained is known as a
cost unit. Cost unit varies from industry to industry and from concern to concern. A
no of cost units maybe used within an organization for different purpose. Cost unit is
the basis of measuring cost and making comparison between actual cost and
predetermined standards
The forms of ascertainment used as cost units are usually the units of physical
measurement like number, weight, area, length, value, time etc.. Cost unit is a
device for the purpose of breaking up or separating up into smaller sud-divisions,
these smaller sub-divisions are attributed to product or services to determine.
Product or service or costs of time spend for a particular job etc.
Advantages
a. Revel profitable and unprofitable activities: on this information management
may take step reduce or emulate wastage and ineffenciey occurring in the
form of ideal time, under utilization of planned capacity spoilage of material
etc.
b. helps in cost control by using of techniques of std costing and budgeting
control
c. helps in decision making: ie provides related information for decision such as
introduction of new products replacement of old machinery, make or buy etc
d. Guides in fixing selling price: cost is one of the most important factor to be
considered while fixing price especially at times of deprecation. The price may
have to be fixed below total cost.
e. Helps in inventory control: perpetual inventory is an integral part of ca and
helps in preparation of entire p&l a/c. cost accounting also uses inventory
control techniques like ABC analysis etc
f. Helps in cost reduction : ca helps in finding out new improved ways to reduce
cost through the introduction of cost reduction programme
g. Revels idle capacity: the concerned may not be working to full capacity due to
reasons sudden shortage of demand , machine breakdown or other bottle
neck (experiment) in production a cost accounting system can easily work out
the cost of idle capacity so that management can take immediately steps to
improve the position
h. Aids in formulating policies: it provides such information that enables
management to formulate pricing policies preparing estimates of contracts
and tenders
i. Prevent frauds and manipulation : cost audit system helps in preventing
manipulation and fraud and thus gives reliable cost data to management and
others
j. Check the accuracy of financial accounts: with the help of reconciliation
between financial accounting and ca at the end of the accounting period
Cost centre
Cost centre is the smallest segment of activity or area or responsibility for which
costs are accumulated cost centre is defined as by “CIMA” of UK as “a location
person or item of equipment (or group of these) for which cost may be ascertained
and used for the purpose of control” it may be a location ie a sales area, an item of
equipment ie a machinery or a delivery van, a person ie as sales man or a machine
operator or a group of these
The determined of a suitable cost centre is very important for ascertainment and
control of cost. It enables accumulation of all such causes at one place for which a
common base of recovery may be used.
Classification is the process of grouping like facts under a common destination on the
basis of similarities of nature attributes or relations.
Need for cost classification: arises due to use of cost data for a verity of purpose the
same cost data can’t serve all purpose equally hence cost must be arranged and
classified in such a way that they can be combined in different ways to serve
different purpose. The following are the list of purpose the following are the list of
purpose that cost classification serves
1. ascertainment of profits periodically: profit can be ascertained only when the
relevant revenue is compared with the relevant cost
2. preparation of budget ; the classification helps in preparation of budget for
instance when flexible budget are prepared for different levels of activity , the
fixed cost remains constant at all levels of activity were as variable cost varies
according to level of output
3. cost control: fixed cost are mostly uncontrollable and if at all any control can be
exercised it can be done by the top level management , variable cost on the other
hand are mostly controllable when cost are classified s controllable cost and
uncontrollable
4. fixed selling price: in case of classification for the purpose of fixing selling price
the information needed will vary with the situation in which selling price is fixed
(marginal costing)
5. Observation of overheads (indirect cost) by classifying cost into fixed and variable
separate rates of absorption of overheads may be used the under observation or
over absorption arising out of the overhead are different in nature and need
different managerial action.
6. Other uses while planning cap. Expenditure: effect of proposed project on fixed
and variable cost should be studied more over differential and comparative cost
analysis are bases on classification of cost as fixed or variable
Methods of costing
Specific order costing Operation costing
Job order costing Single /operation/output
Contract costing Operating costing
Batch costing Process costing
Multiple
Departmental
Specific order costing is defined as the category of basic costing method applicable
were work consist of separate contracts, job or batches each of which is authorized
by a special order or contract this method is adopted in made –to-order, type of
products which depends entirely on specification of customers as such there is known
standardization in production process for want of uniformity
Contract costing:
A work usually a constructional nature and is that form of specific order costing for
which customer requirements are taken and each order is off a long duration
Work is performed at the premises of the contractee
Most of the expenses are chargeable are direct in nature
Eg: building, road, dams, bridge etc...
Batch costing:
Is defined as that form of specific order costing which applies were similar articles
are manufactured in batches either for sale or for use within the under taking
It is similar to job costing
A convenient batch of production is rated as a job
Eg: bakery, hardware like bolts scores &Pharma industries
Operation costing
Is defined as basic costing method applicable were stdised goods or services result
from a sequence or repetitive and more less continuous operation or process to
which cost are charged before doing average over the units produced during the
period
Process costing: is that form of operation costing which applies where stdized goods
are produced. It is that method of costing where cost is ascertained at every stage of
the process
Features:
Out put of one process is passed as input of the subsequent process unit
production is complete
The cost of every process is transferred to the subsequent process
The process industries incase normal and abnormal losses usually
In a majority of process industries by products are obtained in addition to the
main the product
The cost of semi-finished goods are generally expressed in terms of fully
finished goods and this process is called equivalent production
Eg : sugar industry, breweries petroleum , paints
Departmental costing: under this method of costing the cost incurred in mft of
particular department is ascertained