1. III B.Com. SEMESTER V BY B.V.MANOHAR BABU
COST ACCOUNTING
III B.Com. SEMESTER V
BY B.V.MANOHAR BABU

2. Definition of Cost Accountancy
Institute of Cost and works Accountants, London defines cost accountancy as “the application of costing and cost accounting principles methods techniques to the science and art and practice of cost control and the ascertainment of profitability it includes the presentation of information derived there from for the purpose of managerial decision making”.

3. Functions of Cost Accounting
A major function of cost accounting is the determination and analysis of costs and incomes of business enterprises thereby Comparisons between divisions, periods of time can be made in order to evaluate The operating efficiency of each divisions of process, department and operation Etc.,
The object of cost accounting is to maintain cost at lowest point consistent
with the most efficient operating conditions. Sot his object requires examination of each cost in the light of service or benefit obtained and planning in the form of standards for what material, labour, overheads should be necessary for each job, department or process.
The third function is the proper matching of costs with revenues.
The fourth function is special studies include the pricing of new products or services, expansion or contraction programmes, replacement or machinery and equipment, charges in distribution etc.
The technique of costing is to produces statistical information of the internal operations, by which management may conduct its business towards profitable operations.

4. Objectives of cost accounting
1. To serve as a guide to price fixing of product manufactured or services rendered.
2. To disclose sources of wastage, whether of material, time or expense or in the use of machinery, equipment and tools.
3. Te reveal sources of economy in production.
4. To disclose the degree of efficiency of the various departments of the factory, workers, plants and machinery.
5. To exercise effective control on the idle time of the machines and the workers, labour cost of each department, different kinds of wastages and receipt and issue of stores material

5. Advantages of Cost Accounting
The cost system reveals unprofitable activities losses or inefficiencies in the form of wastage of manpower, wastage of material and wastage of other resources like plant and machinery.
Introduction of cost system leads to economy. This is a continuous all around effect towards new and improved methods so as to reduce cost.
Cost accounting locates the exact causes for decrease or increase in the profit or loss of a business so with points out unprofitable products or product lines which may be eliminated or alternative measures may be taken.
Guidance may be given to the management either by a goods cost system or by a cost accountant on the problems such as weather to purchase or manufacture a particular component whether to accept orders at particular price, which type of machinery used to be purchased.
Cost accounting is useful for price fixation products. Although the price is generally related more to economic conditions than to cost, the latter serves as a guide to adequacy of selling price.

6. Limitations of Cost Accounting
1) The system is quite expensive because analysis, allocation and apportionment of costs and absorption of overheads require considerable amount of clerical work.
2) The results shown by the cost accounts differ materially from those shown by the financial accounts. Preparation of reconciliation statements frequently is necessary to verify their accuracy. This leeds to unnecessary increase in work load.
3)Costing system itself does not control costs or improve efficiency. If the management is alert and efficient, it can control costs without the aid of this system

7. Differences between Cost and Financial Accounts
The main aim of financial accounts is to ascertain the net result of the business and to show the nature of changes that have taken place during the reading period. Whereas the primary object of costing is to show real cost producing an article thereby given a fair price.
Financial accounts revealed the combined profit or combined loss of all the deportments of a business undertaking. But the cost accounts should show the profit or loss earned by each department in particular.
Cost accounts should show how the profit is earned or how the firm has made up losses in a detailed manner. But financial accounts show the profit or loss and not give any reasons for such result.
Financial accounts are mainly recording the transactions with outside i.e. customers, suppliers etc. They have not given much importance to the internal organization. But cost accounts have given greater importance to the internal organization of the business.
Cost accounts provide necessary information to measure efficiency of organization. The variance between the actual and standards or estimation or budgets, as the case may be, should be useful for the measurement or efficiency. Financial accounts reveal the profit or loss, which is not real indication of efficiency.

8. Steps to install a Costing System
Nature method and stages of production, the number varieties and the quantity of each product and such other technical aspects should be examined.
What are the objects which the management wants to achieve and what sort of information it requires for the achievement of such should kept in view.
Factors that is significant. For example, if materials used are insignificant, an elaborate system of materials control will not be necessary.
Methods of purchase, receipt storage and issue of materials should be examined and modified wherever considered necessary.
The type of labour which is required the methods of remuneration

9. Elements of Cost Direct Material
Direct material are those substances which can be directly identified with any cost center
Direct Labour
Labour is defined as human effort by the application of which utility is created
Direct Expenses
Direct expenses refers to any expenses other than direct materials and direct labour which is incurred on a specified cost unit.

10. Advantages of Perpetual Inventory System
It eliminates the elaborate and costly periodical stock taking.
There is no need of closing down business for the purpose of stock taking.
Bin cards and stores ledger gives ready figures of stock position at any time.
Constant reconciliation of book balances with physical stocks is possible.
It facilitates preparation of interim profit and loss account and the balance sheet.

11. ABC Analysis
It is a simple but effective technique of inventory control. The main purpose of this tool is to concentrate on the high value items rather than on all the items indiscriminately. All items of material are classified into three categories-high, medium and low value items and named as A,B and C items respectively. The ‘A’ items should be under the tightest control and it is the responsibility of the most experienced personnel. The ‘B’ items should be under the normal control procedures and the ‘C’ items should be under the simple and economical methods of control. This technique is based on the principle of ‘management by exception’. It is also known as the Selective Method of Inventory Control. It aims at concentrating efforts on those items where attention is needed the most.

12. Advantages of ABC Analysis
This technique ensures closer and stricter control on those items, which represent larger amounts of capital invested.
It helps in maintaining enough stock for ‘C’ category items.
It assists in the maintenance of high stock turnover rate.
It minimizes cost of placing orders and carrying costs with proper economic order quantities.
It regulates investments in inventory and thus releasing working capital, which can be utilized in the best possible way.

13. Bin card It give information in physical units.
It is kept attached to bin in stores.
It give information in physical units.
Entries are made by stores clerk.
Entries are passed on the basis of actual quantity received or issued.
Each transaction is posted separately.

14. Stores Ledger It is maintained in cost office.
It provides information both in units as well as in rupee values.
Entries are made by cost clerk.
Entries are supported by “Goods Received Note”, Material requisition” etc.
Transactions may be entered in summary
periodically.

15. Economic Order Quantity (E.O.Q.)
In purchasing materials one important problem which arises is how much to purchase? There are certain disadvantages when large quantities are purchased at a time. Similarly frequent purchase in small quantities also involve certain drawbacks. Therefore an ideal quantity to be purchased is determined well in advance. This is called Economic Order Quantity.

16. Characteristics of a good incentive plan
The incentive plan should be simple and easily understood by the employees.
The system should be fair both to the employer and the employee.
The employee should be assured of a minimum wage irrespective of his production.
The reward must be linked with the effort involved.
The scheme must be definite and should not be changed very frequently

17. Advantages of Halsey Plan
It guarantees time wages.
It is simple to understand and easy to calculate.
It encourages efficiency because efficient workers are rewarded for finishing the job before standard time.
Advantages arising out of increased production are shared both by the employee and the employer.
Saving in time reduces both labour cost as well as overhead expenses per unit of production

18. Disadvantages of Halsey Plan
The worker is not given the full benefit of his efficiency because he is paid only 50% of the time saved by him.
This plan does not give protection to the employer against bad-rate setting.
Fixation of standard is very difficult.
At higher level of efficiency the earning reduced. Therefore, it does not act as a sufficient incentive.

19. Advantages of Rowan Plan
It assures minimum time wage.
It provides good incentive for slow worker and learners.
It enables the employer to share in the advantages arising out of increased production.
This plan protects the employer from loose-rate setting.
Since bonus declines at high level of efficiency, worker does not overwork. Hence over production can be controlled

20. Dis-advantages of Rowan Plan
This plan is more complex and expensive.
Calculation of bonus is not followed by the workers. This may give rise to suspicion in the minds of the workers

21. THANK YOU