Unit-I

Introduction to Cost Accounts

Q1) Define Cost Accounting and how did it Evoluted? (8 marks)

A1) Costing:

The Society of cost control accountants (ICMA) London defines costing as a confirmation of costs, and costing includes the technology and process of confirming costs.

Cost accounting:

The Society of cost management accountants (ICMA) in London defines cost accounting as"the science, art and application of the principles, methods and techniques of cost accounting and cost accounting to the practice of cost management and confirmation of profitability, as well as the presentation of information for the purpose of management decision making". Therefore, cost accounting includes costing, costing, Budget Control, cost control, and cost audit. Costing refers to the process of determining and accounting for the cost of a particular product or activity. It also includes classification, analysis and guessing the production of costs.

Costing:

I.C.M.A.London defines costing as"the process of accounting for costs from the time when expenditures occur or from the time when they are committed to establishing the ultimate relationship with cost centers and cost units."

In practice, costing, costing, and cost accounting are often used interchangeably. Cost accounting refers to the confirmation of costs, the accumulation and measurement of costs of activities, processes, products or services. Cost data is used to create costing sheets or cost sheets. Costing is a professional Department of accounting that helps manage costs to control and create awareness of the importance of costs to the well of the business organization. Managing a business to achieve its objectives requires systematic and useful cost data and reporting.

Cost accounting is a method of managerial accounting which aims to capture the total production cost of a business by measuring the variable costs of each production phase as well as fixed costs, such as a lease expense.

Historians believe that cost accounting was first introduced during the industrial revolution when the new global supply and demand economies forced producers to begin monitoring their fixed and variable costs to automate their manufacturing processes.

Cost accounting allowed rail and steel companies to manage costs and make themselves more competitive. By the early 20th century, cost accounting had become a widely discussed subject in the literature of business management.

A company's internal management department uses cost accounting to define both variable and fixed costs associated with the manufacturing process. It will first individually calculate and report these costs, then compare input costs with production results to assist in assessing financial performance and in making potential business decisions.

Cost accounting includes several forms of costs which are listed below.

1. Fixed costs
2. Operating costs
3. Direct costs
4. Variable costs
5. Indirect costs

Difference between Cost Accounting and Financial Accounting

Cost accounting is sometimes used to assist decision-making by management within a business, whereas financial accounting is usually used by outside investors or creditors.

Financial accounting reveals the financial status and results of a corporation through financial statements to external outlets, which provide information regarding its sales, expenditures, assets, and liabilities.

Cost accounting can be most useful in budgeting and setting up cost reduction systems as a method for management, which will increase the company's net profits in future.

The key distinction between cost accounting and financial accounting is that while the costs are categorised according to the type of transaction in financial accounting, cost accounting classifies costs according to the management's information needs.

Cost accounting, as it is used by management as an internal method, does not have to follow any common requirements, such as commonly agreed accounting principles (GAAP) and, as a result, differs in use from business to company or department to department.

Types of Cost Accounting

1. Standard Costing
2. Activity-Based Costing
3. Lean Accounting
4. Marginal Costing

Meaning of Cost Accounting

Cost accounting is a method of managerial accounting which aims to capture the total production cost of a business by measuring the variable costs of each production phase as well as fixed costs, such as a lease expense.

Historians believe that cost accounting was first introduced during the industrial revolution when the new global supply and demand economies forced producers to begin monitoring their fixed and variable costs to automate their manufacturing processes.

Cost accounting allowed rail and steel companies to manage costs and make themselves more competitive. By the early 20th century, cost accounting had become a widely discussed subject in the literature of business management.

A company's internal management department uses cost accounting to define both variable and fixed costs associated with the manufacturing process. It will first individually calculate and report these costs, then compare input costs with production results to assist in assessing financial performance and in making potential business decisions.

Cost accounting includes several forms of costs which are listed below.

1. Fixed costs
2. Operating costs
3. Direct costs
4. Variable costs
5. Indirect costs

Difference between Cost Accounting and Financial Accounting

Cost accounting is sometimes used to assist decision-making by management within a business, whereas financial accounting is usually used by outside investors or creditors.

Financial accounting reveals the financial status and results of a corporation through financial statements to external outlets, which provide information regarding its sales, expenditures, assets, and liabilities.

Cost accounting can be most useful in budgeting and setting up cost reduction systems as a method for management, which will increase the company's net profits in future.

The key distinction between cost accounting and financial accounting is that while the costs are categorised according to the type of transaction in financial accounting, cost accounting classifies costs according to the management's information needs.

Cost accounting, as it is used by management as an internal method, does not have to follow any common requirements, such as commonly agreed accounting principles (GAAP) and, as a result, differs in use from business to company or department to department.

Types of Cost Accounting

1. Standard Costing
2. Activity-Based Costing
3. Lean Accounting
4. Marginal Costing

Evolution of Cost

Widespread interest in the subject of costing can be said to have developed in the Industrial Revolution, which began in 1760. As the factory system was followed by mechanization, simplification, standardization and mass production, costing had to keep up with these developments. Until the 18th century, costing was in the area of Engineers. Integration with financial accounting began when accountants began to audit cost records. Under the influence of financial accountants, costing came to be seen almost exclusively as a means of inventory valuation and profit measurement.

Costing has been found to assist in managing when compiling and providing the required statistical data.  It has developed rapidly and assisted management of providing valuable information to take appropriate decisions in time. Costing sheds light on excessive waste of materials, inefficient labor operations, idle machinery and many other similar factors that are responsible for the reduction of profits in business activities. Management has found that costing can provide valuable assistance in planning, managing and coordinating activities.

Q2) Write short note on Cost Center and Cost units.(5 marks)

A2) Cost center: A cost center is a place, person or asset that can be checked for costs and used for cost management purposes. This is an organizational segment or area of activity that is used to accumulate costs. The different types of cost centers used in manufacturing organizations are personal cost Cantor, impersonal cost center, work cost center and process Center.

The Institute of Cost and Management Accountants (ICMA), which is based in London, defined a cost center a location, person, or item of equipment (or a group of these) for which costs may be ascertained and used for the purposes of cost control. 

That’s to say, a cost center refers to any place, person, machine, section, part, activity, or function within an organization or undertaking by which costs are collected or accumulated, and to which costs are allocated.

Given the above, a cost center is, therefore, a natural division of an undertaking that helps to measure and understand operational costs and apply costs to products. 

A cost center in a company is formed by considering the convenience of cost accumulation, comparability, and cost control. If costs are accumulated for a person, machine, or department, then this entity will be treated as a cost center.

In an undertaking, cost centers may be divided into two parts:

1. Production cost centers
2. Service cost centers

A production cost center refers to a cost center that is engaged in regular production (e.g., converting raw materials into finished products). 

A service cost center is a center that is not engaged in regular production, but which assists the production cost centers in implementing their activities (e.g., store department, personnel department, or maintenance department).

Cost centers can also be divided into operation cost centers and process cost centers, as well as personal cost centers and impersonal cost centers. 

Operation cost centers are cost centers that consist of machines and/or persons carrying out similar operations, while a process cost center is one that consists of a specific process or a continuous sequence of operations.

A personal cost center is a cost center that consists of a person or group of persons (e.g., departmental foreman, salesman, supervisor, and factory manager). 

An impersonal cost center refers to a cost center that consists of a location, item of equipment, or a group of these (e.g., machines, departments, and vehicles).

Factors for Selecting a Suitable and Effective Cost Center

The selection of a suitable cost center depends on several factors, including:

1. Layout and organization of a factory
2. Availability of cost data and information
3. Management policy regarding the selection of cost centers

Classification of Cost Centers

Cost centers can be classified under the following three broad areas:

Productive, Unproductive, and Mixed Cost Centers

Factories might choose productive cost centers whereas an administrative wing might choose an unproductive cost center. Similarly, a tool department may choose a mixed cost center.

Personal and Impersonal Cost Centers

When a plant or machine is taken as a unit, it is an impersonal cost center; when a person or group of persons are taken as a unit, the personal cost center is implied. 

According to the Institute of Cost and Management Accountants, “Impersonal cost center consists of a location of item of equipment whereas personal cost center consists of a person or a group of persons.”

Operation and Process Cost Centers

According to the Institute of Cost and Management Accountants, the “operation cost center is a center which consists of those machines and/or persons which carry out the same operations.” 

By contrast, the “process cost center is a cost center which consists of a continuous sequence of operations.”

Cost units: A cost unit is a unit of the quantity of a product or service for which the cost is likely to be confirmed. There should be a unit of activity for proper confirmation of costs. Every organization has its own units for the measurement of raw materials and finished products. When the unit of activity is determined, it becomes the cost unit of the cost accountant. The cost unit must be suitable for your organization. The following is an example of cost units in different industries :-

What Is a Cost Unit?

After costs have been ascertained, accumulated, classified, and recorded, they must be related to a convenient measure of the quantity of the product or service. This measure of the quantity of a product or service is known as the cost unit.

A cost unit is defined as “a unit of quantity of product, service, or time (or a combination of these) in relation to which costs may be ascertained or expressed.” In other words, a cost unit is a standard or unit of measurement of the goods manufactured or services rendered. 

A cost unit may be expressed in terms of number, lenth, area, weight, volume, time, or value.

Characteristics of a Cost Unit

A unit of cost must possess the following characteristics:

1. It must be one that expenditure can be conveniently associated with.
2. It must be appropriate or natural to business operations and the product.
3. It must be certain or definite and not change over time.
4. It must be simple to understand and to quote.
5. It must be universally accepted.

Types of Cost Units

Cost units can be categorized as follows:

Simple Unit: These use a single standard or unit of measurement of the goods manufactured (e.g., per piece, per kilogram, per quintal, per ton, per gallon, or per meter).

Composite Unit or Complex Unit: These combine two simple units (e.g., per passenger-kilometer, per ton-kilometer, or per kilowatt-hour).

The terms of measurement used in cost units are:

1. Number
2. Area
3. Volume
4. Length
5. Weight
6. Time
7. Value

Cost units are always selected carefully based on the nature of business operations.

For instance, the cost unit of steel is naturally ascertained in terms of per ton. Similarly, the cost unit of carrying a passenger by a transporter is naturally ascertained in terms of the distance traveled in kilometers.

Q3) What are the Objectives of Cost Accounting? (5 marks)

A3) Cost accounting is a method of managerial accounting which aims to capture the total production cost of a business by measuring the variable costs of each production phase as well as fixed costs, such as a lease expense.

Historians believe that cost accounting was first introduced during the industrial revolution when the new global supply and demand economies forced producers to begin monitoring their fixed and variable costs to automate their manufacturing processes.

Cost accounting allowed rail and steel companies to manage costs and make themselves more competitive. By the early 20th century, cost accounting had become a widely discussed subject in the literature of business management.

A company's internal management department uses cost accounting to define both variable and fixed costs associated with the manufacturing process. It will first individually calculate and report these costs, then compare input costs with production results to assist in assessing financial performance and in making potential business decisions.

Cost accounting includes several forms of costs which are listed below.

1. Fixed costs
2. Operating costs
3. Direct costs
4. Variable costs
5. Indirect costs

Cost accounting goals are usually used to indicate activities in which costs must be determined individually. Activities can be functions for which data is required,sub-divisions of the organization, contracts or other units of work.

Objectives of Cost Accounting:

Objectives of cost accounting are ascertainment of cost, fixation of selling price, proper recording and presentation of cost data to management for measuring efficiency and for cost control and cost reduction, ascertaining the profit of each activity, assisting management in decision making and determination of break-even point.

The aim is to know the methods by which expenditure on materials, wages and overheads is recorded, classified and allocated so that the cost of products and services may be accurately ascertained; these costs may be related to sales and profitability may be determined. Yet with the development of business and industry, its objectives are changing day by day.

Following are the main objectives of cost accounting:

1. To ascertain the cost per unit of the different products manufactured by a business concern;

2. To provide a correct analysis of cost both by process or operations and by different elements of cost;

3. To disclose sources of wastage whether of material, time or expense or in the use of machinery, equipment and tools and to prepare such reports which may be necessary to control such wastage;

4. To provide requisite data and serve as a guide for fixing prices of products manufactured or services rendered;

5. To ascertain the profitability of each of the products and advise management as to how these profits can be maximised;

There is a direct relationship between the information needs of management, the purpose of costing, the technologies and tools used for analysis in costing. Therefore, costing has the following purposes-

1. Determine the cost of the product.
2. To facilitate the planning and management of regular business activities.
3. Provide information for short-term and long-term decisions.

Q4) When you install,how does the costing system looks ?(5 marks)

A4) When you install, the costing system looks like this:-

1         Costing reveals areas where materials were overused, Labor ran inefficiently and expenses incurred exorbitantly.

2         We propose a cost reduction program. Continuous costs in collaboration with technical personnel seeking areas for introducing cost savings bring beneficial results.

3         Cost accounts find specific causes for profit fluctuations. It points out that you lose products and operations. This indicates the reason for the loss and suggests corrective actions in time.

4         Provide management with the right data to choose the best option. You can decide whether to buy or manufacture parts, operate the Machine X or Y, accept or reject orders below the cost

5         The cost account gives the actual costs for price fixing. True supply and demand play an important role in fixing prices. But the cost is an essential guide here.

6         It provides important data up to in the bid. Bids filled with the help of marginal costing technology are successful.

7         Standard Costing and Budget Control help maximum efficiency.

8         Cost comparison helps cost control. Such comparisons can be between different periods of the same department or equivalent operations of different units.

9         Cost data is useful for external institutions such as governments,courts, etc.To make decisions on tariff regulation,settlement of disputes,fluctuations in wage levels, etc.

10    It can play with capacity costs to help overcome operational crises.

11    Marginal costing technology helps to make appropriate short-term decisions in times of trade recession.

12    Costing lays cost center and responsibility center to ensure proper organizational structure.

13    Costing provides a permanent inventory system. This enables inventory management and the creation of short-term profit and loss accounts.

14    The cost of closing the stock of raw materials, work in progress and finished products is readily available in the cost record.

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Q5) What are the methods of Costing?(8 marks)

A5) Cost Accounting is a method of accounting wherein all the costs involved in performing any process, project or product are noted and analyzed. Such analysis helps the management in taking strategic decisions. Cost accounting uses various techniques to make an organization cost effective.

How is cost accounting different from financial accounting?

1. In traditional accounting, the profit and loss is derived by deducting expenses from income whereas in cost accounting the motive is to be cost effective by reducing costs of process, production or project.
2. Financial accounting views an organization in entirety whereas cost accounting segregates the organization into various processes, projects or production units.  
3. Financial accounting is used to present the position of the organization to its stakeholders whereas cost accounting is used for internal review of costs.
4. Financial accounting is uniform across various businesses, however, cost accounting methods vary based on the type of business.

Elements of cost in general:

For a standard manufacturing unit the various costs involved can be segregated into the following :

1. Material
2. Labour
3. Other expenses

These can be further segregated into the following:

1. Direct
2. Indirect

Illustration: Say a toy manufacturing unit procures plastic as a raw material. The cost of plastic is direct material cost. The costs incurred in the packing and transportation of the same is the indirect material cost. Similarly, the labour cost for the production of toys is the direct labour cost whereas the salary of the production supervisor will be indirect labour cost.

The different types of costs

For analyzing the various costs it is imperative to first understand the types of costs. 

1. Fixed Costs: The costs that remain constant despite changes in production,  process or projects are referred to as fixed costs. For example, in a manufacturing unit the salaries of the office staff will remain fixed irrespective of the production. 
2. Variable costs: These costs vary with the production,  process or project changes. For example, in an organization manufacturing toy the material and labour cost will be dependent on the production. 
3. Opportunity cost: The cost incurred in selecting one option over another is called opportunity cost. For example in a toy manufacturing unit with limited labour hours and material, the decision to produce one particular toy say ‘Dancing Monkey’ will result in non-production of an other toy say ‘Spinning top’. So while considering the profitability of toy ‘Dancing Monkey’ the organization has to consider the profit of ‘Spinning top’ that it forgoes. 
4. Sunk cost: Certain costs are incurred and cannot be recovered these are sunk costs.  Continuing with our example of toy manufacturing unit, sunk costs would refer to machinery cost that has been incurred.

The techniques in Cost Accounting

The techniques of costing facilitate managerial decision making. The different types are:

1. Marginal Costing: As per this technique, the management may decide the number of units to be produced.  Suppose a toy unit is already producing 100 units of ‘Dancing Monkey’ toy, this technique will help the management understand that if the production is increased to 150, will it be profitable.  In this technique, only the variable costs for additional units produced will be considered. Fixed costs are not taken into consideration as they do not vary with changes in production. 
2. Standard Costing: In this technique of costing the costs incurred are compared to the predetermined cost of the product,  process or project. The variances are analyzed to bring about cost-effectiveness. 
3. Direct Costing: In this technique all the direct costs incurred for a particular product,  process or project are charged to it and the indirect costs are written off to profit and loss. 
4. Historical Costing: It is comparison of all costs incurred after the process is performed.
5. Uniform Costing: In this technique same costing practices are followed across certain units to facilitate comparison. 
6. Absorption costing: This is a method of full costing.  In this all costs are charged to the product,  process or project.

Several methods or types of costing have been designed to suit the needs of individual business requirements. These are job costing and process costing.

All other costing methods are either variants of these two methods or techniques designed for specific purposes, specific opportunities, and specific conditions.

Job costing:this method is good for checking the cost of a job, a specific order, or a batch of finished products.

Where the cost unit is a job consisting of a specific quantity manufactured according to the order. The work can be small or large. It may be as per customer order for stock for final sale. Other variations of job costing are given below: -

1. Contract costing:this method is used by contractors for construction of architectural bridges etc. Where the unit of cost is the contract. The term of this contract usually extends beyond the current fiscal year.
2. Batch costing: this method produces economical batches of parts for subsequent assembling manufacturers large engineering companies use this method. Here, costing is done for batches of components, not for a single component.
3. Multiple costing:this is used in large industries such as automobile, aircraft flat industry etc.Here the cost of parts is calculated separately. Each component is a job sheet. These are then assembled to complete the cost of an airplane or other finished product.

Process costing:this method is used in industry to manufacture products by continuous process. The cost is confirmed over the period by the process or department, but time is given more importance here as it is clear from the costing of the work. Therefore, this is also called period costing. Examples of industries that use process costing are the chemical industry, papermaking and refineries. The process costing can also be changed without:

1. Work costing:work costing is applied to places where production goes through multiple operations in succession before the final product is manufactured. Wear and tear may occur in each operation. Work costing is used in industries such as Box manufacturing, shoe manufacturing and toy manufacturing. Where the cost unit is the work on which costs are accumulated.
2. Single or output or individual costing: examples of industries applying this method are mining, quarry and steel production where the production is of a continuous nature and the final product is only one or different grades of the same product.
3. Behavior costing:this method applies not to figure out the cost of drawing. Examples of industries using this method are transport services, electrical and boiler houses. In transport services, the unit of cost is passenger kilometers, or kilometers kilometers.

Q6) What are the essentials of a good costing system?(8 marks)

A6) The essentials of a good costing system are:

1. The costing system must conform to the General Organization of the business. Usually no component alternation should be made to facilitate the costing system. However, unavoidable changes can be made in the establishment of the position of holding, and proper costing system.
2. All relevant technical aspects (nature and method of production, product varieties, etc.) should be properly considered in order to adopt appropriate cost control ingenuity.
3. The size, placement and configuration of the factory should be fully described for the advantages of those operating costing systems.
4. It is necessary to clearly specify the procedures that must be followed for the purchase, receipt, storage and issuance of materials.
5. It is necessary to specify the method of payment of wages and the system of labor management.
6. It is necessary to specify the norms of appointment and assignment of overhead.
7. Economics to ensure that the original record can be proper.
8. Form should be obtained printed. It should contain full instructions. Those who use them should be properly trained to ensure the correctness and relevance of the data written on the form.
9. The Examiner must check and sign all entries in the form.
10. Responsibility for preparing and sending cost reports to various levels of management at regular intervals should be fixed and the necessary instructions in this regard be issued.
11. Full cooperation from everyone involved in management should be enlisted. Resistance from employees should be minimal.
12. The cost of managing a costing system must be commensurate with the profit available from it.
13. Design the system appropriately to effectively perform cost control.
14. Cost accounts and financial accounts must be linked. Or the results of two sets of accounts should be adjusted.
15. Frequency, regularity and speed in the presentation of cost reports should be guaranteed.

Q7) Explain the term Cost Accounting. (8 marks)

A7) Overview of Cost Accounting: In the initial, the road was thought of as a value accounting technique of goods or services backed by historical knowledge. Thanks to the character of the market has recognized that crucial prices don't seem to be as vital as dominant prices. Therefore, the prices compared to clerking, clerking was seen additional as a price management technique. Due to the areas of technological development altogether, value | the worth reduction} is presently put together inside the worth space Accounting. Therefore, it's the road of registration, classification and outline of the prices of Identify the worth of any product or service, plan, manage and cut back those prices and see from information to management to come to a decision.

Line meanings and definitions

“Cost accounting are often a way by that info consists, apportion summed up and understood for three main purposes: (in) elaboration and operational management, (ii) specific decision; and (iii) product Decision. "Charles T. Horngren

“Cost accounting is the strategy of the road from the aim that the unit of expenses incurs of committed to manufacturing your final relationship with value units. Inside the broadest sense, it includes the production of mathematical knowledge, the dear device management strategies and, moreover, the identification of

The profitableness of the activities assigned or planned is written as results of the appliance of accounting and equity accounting Principles, strategies and techniques for crucial prices and to investigate savings and / or surpluses as compared to previous expertise or standards. "- Institute of prices and Management contain the presentation of the info that has therefore been derived for the aim of decision-making in social control positions. –Wheldon

Cost accounting therefore provides management with info for elections of every kind.  This is why the functions have invariably been indistinguishable from management accounting or alleged accounting internal accounting. Wilmot has adopted the road kind as "scan, record, Standardization, Prediction, Comparison, News and suggestions “and the role of a price account itself from "a scholar, news agent and Rophet"

Costing, called the form of management accounting that companies use to classify, summarize, and analyze different costs, helps management make better decisions for cost control and cost savings. The main function of costing is said to be to adjust, record, and identify investment allocations that are appropriate for the investment in determining the cost of goods and services. It also helps present relevant data to administrators involved in searching for services, contracts, or shipping costs.

It also contains information related to production, distribution and sales costs.

Q8) What are the benefits of Cost Auditing.(8 marks)

A8) Unique Feature of Cost Audit:

The audit of cost accounts has attained its present status in the statute book of our country through a gradual process of industrial development and socio-economic expectations. During World War I, a large number of firms were given contracts by the Government “on a cost-plus basis”, and the defence establishments used to verify and investigate the costs structure.

The statutory cost audit started in the year 1965 when the Companies Act, 1956 incorporated the provision for cost audit in clause (d) to Section 209 and to Section 233B. This provision was made on the basis of recommendations from Vivian Bose Commission, Dutta Commission and Shastry Committee, where it was thought necessary to institute proper cost accounting system in the industrial sector of our economy.

They felt that the financial audit had its own limitations to satisfy the Government, shareholders and public with regard to the valuation of inventory, cost of goods produced and sold, and work-in-progress.

In addition to Section 233B of the Companies Act, 1956 the Cost Audit (Report) Rules, 1996 came into existence prescribing the time and manner and the format of the Cost Audit Report. The unique features of statutory cost audit can be best understood by the purposes it serves and the potentials it possesses.

The purposes of cost audit are:

i. To see that the cost accounting principles have been followed properly in the main­tenance of cost accounts records as prescribed under the relevant Cost Accounting Records Rules,

Ii. To compare historical or actual costs with those attainable under efficiency audit,

Iii. To examine earning, efficiency or inefficiency of the organisation and to optimize the use of resources—national, financial, physical and human, and to achieve the rated capacity of the organisation,

Iv. To institute cost consciousness,

v. To facilitate inter-firm comparison of costs, selling price fixation, tariff rate deter­mination, and lastly,

Vi. To ensure, in the sense of propriety and efficiency:

(a) Whether the planned expenditure would give optimum results,

(b) Whether the size and channels of expenditure were designed to produce best results, and

(c) Whether the return on the capital employed could or could not be improved by adopting some alternative plan of action.

Cost audit as a profession has immense potentialities in India particularly in the context of present state of affairs, viz., underutilization of productive capacities, low rate of productivity, wastage of national, physical, financial and huge manpower resources and inefficient management of industrial enterprises.

As a discipline, the ascertainment of true and fair view of cost of different products is definitely a major objective of cost audit, but it is not all. An offshoot of cost audit is the determination of the levels of efficiency at which the companies engaged in manufacturing, processing, and mining activities have been operating.

The management is afforded an opportunity to determine the movements of costs both total and various components of different products produced in conditions of varying product-mix, varying capacity utilisation, varying market prices and varying market segments.

Data thrown up by cost audit offer a unique opportunity, at the level of the Government, to compare efficiency levels of different firms brought under cost audit. The cost information available under this kind of audit also appears highly logical in the context of formulation of export incentive policy, drawbacks, refunds, reliefs, etc.

Benefits of cost auditing:

The main advantage of cost auditing is that it ensures that management has reliable data for price-fixing, decision-making, control, and other purposes. The existence of such an audit system is additionally very helpful in maintaining internal checks. It's also very useful for accounting audits. However, it's important to know that financial and price audits have different purposes.

The former aims to stop fraud and errors, and by presenting the earnings report and record , it's possible to understand things (profit obtained during the year and economic condition at the top of the year) during a true and fair manner. Is aimed toward .

It's not about functional analysis, it's about spending and revenue as an entire . Cost audits are involved within the proper analysis and estimation of data in order that management can quickly obtain the knowledge they have , establishing cost accuracy for every product, job, activity, and so on. Aside from data reliability, cost auditing has certain incidental benefits. Rather, it must be said that cost audits help integrate and realize the advantages expected from costing systems. Following a press release by Minister of Justice HR Go Curry, judicial and company issues highlight the social benefits of cost auditing.

The reasonableness of the worth charged is to properly determine the prices and margins charged by producers and their retailers. Guaranteed only by. Another purpose underlying this step is cheap to take care and efficient for the industries subject to such rules and to scale back costs the maximum amount as possible. Informing about the value . Therefore, counting on this method protects the interests of consumers and may be a clear step towards eliminating social injustice.

Advantages of Cost Audit

(I) Thoroughly check all waste (in-store materials, workers, etc.), promptly identify and report.

(II) Production inefficiencies (or efficiencies) are identified and converted into financial terms.

(III) Exceptional management is possible by establishing individual responsibilities.

(IV) The budget control and standard costing system is greatly facilitated by cost audits by qualified costing personnel.

(V) Records are up to date and information is available for a variety of purposes.

(Vi) Cost audits can uncover many errors and frauds that may not otherwise be revealed. This is because cost auditors take a closer look at spending and compare it to criteria to see the exact reason for the discrepancy.

Q9) Mention the importance of Cost Accounting.(5 marks)

A9) Cost accounting is the reporting and analysis of a company's cost structure. Cost accounting is a process of assigning costs to cost objects that typically include a company's products, services, and any other activities that involve the company.

Cost accounting is helpful because it can identify where a company is spending its money, how much it earns, and where money is being lost. Cost accounting aims to report, analyze, and lead to the improvement of internal cost controls and efficiency. In short, cost accounting is a system of operational analysis for management.

Often, the simplest and most important objective of cost accounting is to determine selling prices. A business that sells sandwiches, for example, would need to track the cost of bread, lettuce, sandwich meats, mustard, and other ingredients. Otherwise, it would be difficult to calculate how much to charge for a sandwich.

Cost accounting is also used to help with cost controls. Firms want to be able to spend less on their inputs and charge more for their outputs. Cost accounting can be used to identify inefficiencies and apply the necessary improvements needed to control costs. These controls can include budgetary controls, standard costing, and inventory management.

Cost accounting can help with internal costs such as transfer prices for companies that transfer goods and services between divisions and subsidiaries. For example, a parent company overseas might be the supplier for its U.S. Subsidiary, meaning the U.S. Company would be charged by the parent for any purchases of materials.

Cost accounting can contribute to the preparation of the required financial statements, an area otherwise reserved for financial accounting. The prices and information developed and studied through cost accounting are likely to make it easier to gather information for financial accounting purposes. For example, raw material costs and inventory prices are shared between both accounting methods.

Entrepreneurs and business managers rely on actionable information before making allocation decisions. Cost accounting buoys decision-making because it can be tailored to the specific needs of each separate firm. This is different than financial accounting, in which GAAP and International Financial Reporting Standards (IFRS) regulate method and presentation.

Importance of Cost Accounting

Costing is very important for commercial organizations. It also helps other organizations. One of such areas is the presentation of information in the most useful way. Costing is used to measure, analyze, or estimate costs. Reporting to stakeholders on the profitability and performance of individual products, departments and other segments of an organization, internal or external, or both costing concerns the synthesis and analysis of costs. Its purpose in modern times is to support management in the twin functions of decision-making and control. Therefore, costing is not just about finding costs, but advises on the management, planning and management of organizations and business operations. The Companies Act also stipulates that certain companies must maintain cost accounting records and accounts and conduct audits of cost accounts.

Q10) What are the advantages of Cost Accounting? ( 8 marks)

A10) Cost accounting helps zero in on your expenses and how they apply to each aspect of your business.

1. Cost accounting focuses on the expenses involved with running your business.
2. It is a common form of accounting for manufacturing businesses, as it allows them to break out costs for each product they produce.
3. Cost accounting, when it's used appropriately, can help businesses identify areas where they can save money.

A key component of accounting is knowing how much you are spending. If you don't have a handle on your expenses, you never know whether your business is making money. That's where cost accounting comes in. Cost accounting is centered specifically on the costs associated with running your business. Before you can dig into cost accounting, it is important to understand what it is exactly, the different types of cost accounting and the benefits of this type of financial tracking.

Cost accounting is a method of accounting that focuses purely on a business's costs – both fixed and variable. Using the cost accounting method, companies track all of their costs and allocate them to individual processes or units of production, allowing managers to better understand the economics of their business's activities.

Cost accounting is especially important for businesses that manufacture and sell at scale and/or have diverse product lines, as these companies have many costs associated with manufacturing, packaging, and distributing their goods. For these types of businesses, accounting for costs is critical to accurately calculating profit margins, as well as budgeting, forecasting and identifying efficiencies. 

More than other types of accounting, cost accounting gives companies a comprehensive view of their costs. Cost accounting tracks all of a company's costs associated with its offerings and allocates them to specific products or activities. Whereas in financial accounting, costs appear as just one- or two-line items on a budget, cost accounting lets businesses break expenses down to see exactly what is driving costs. This can provide better insights into what the company can do to cut costs and increase profits.

After all, there are only two ways for companies to make more money: They can either increase sales (which is largely beyond their control), or they can cut costs (which they have greater control over).

Not only can you understand the total costs involved to produce your products, but it can be easier to spot instances of overcharging by vendors. Additionally, your company may be able to find efficiencies that allow you to save money.

Some of the benefits of cost accounting include the following:

1. Cost allocation: Managers can allocate costs by product line and per unit of production or hour of labor.
2. Profit drivers: Cost accounting helps business owners gain a deeper understanding of their profit margin and what drives it.
3. Budgeting and forecasting: Calculating costs for individual activities helps senior managers plan for future spending and forecast their finances into the future.
4. Cost savings: Using cost accounting, businesses may be able to identify new efficiencies to help save money.
5. Quicker decisions: Cost accounting can help managers respond quickly to changes in the market, such as when the cost of raw materials increases.

Advantages of Cost Accounting are:

1. Costing reveals areas where materials were overused, Labor ran inefficiently and expenses incurred exorbitantly.
2. We propose a cost reduction program. Continuous costs in collaboration with technical personnel seeking areas for introducing cost savings bring beneficial results.
3. Cost accounts find specific causes for profit fluctuations. It points out that you lose products and operations. This indicates the reason for the loss and suggests corrective actions in time.
4. Provide management with the right data to choose the best option. You can decide whether to buy or manufacture parts, operate the Machine X or Y, accept or reject orders below the cost
5. The cost account gives the actual costs for price fixing. True supply and demand play an important role in fixing prices. But the cost is an essential guide here.
6. It provides important data up to in the bid. Bids filled with the help of marginal costing technology are successful.
7. Standard Costing and Budget Control help maximum efficiency.
8. Cost comparison helps cost control. Such comparisons can be between different periods of the same department or equivalent operations of different units.
9. Cost data is useful for external institutions such as governments,courts, etc.To make decisions on tariff regulation,settlement of disputes,fluctuations in wage levels, etc.
10. It can play with capacity costs to help overcome operational crises.
11. Marginal costing technology helps to make appropriate short-term decisions in times of trade recession.
12. Costing lays cost center and responsibility center to ensure proper organizational structure.
13. Costing provides a permanent inventory system. This enables inventory management and the creation of short-term profit and loss accounts.
14. The cost of closing the stock of raw materials, work in progress and finished products is readily available in the cost record.

Not all organizations get all the advantages mentioned above.

Q11) Write the Composition of elements of cost. (8 marks)

A11) A classification has to be made to arrive at the detailed costs of departments, production orders, jobs or other cost units. The total cost of production can be found without such analysis, and in many instances an average unit cost could be obtained but none of the advantages of an analysed cost would be available”. Harold. J. Wheldon.

Simple ascertainment of total cost cannot satisfy the various requirements of decision making. For effective control and managerial decision making, data is to be provided on the basis of analysed and classified costs. In order to satisfy this objective, cost is analysed by elements of cost i.e., by nature of expenditure.

Composition of elements of cost are:

The manufacturing organization converts raw materials into finished products. To that end, it employs labour and provides other facilities. It is necessary to check the amount spent on all this, while aggregating the cost of production. For this purpose, the cost is mainly classified into various factors. This classification is necessary for accounting and management. The cost elements are

(i) Direct material

(II) Direct labour

(iii) Direct expenses and

(iv) Overhead.

The following chart shows the wide heading of the cost and these acts as the basis for preparing the cost sheet.

Elements of cost

Materials Labour Other Expenses

Direct Indirect Direct Indirect Direct Indirect

Overheads

Factory Administrative Selling & Distribution

(i) Direct Materials Cost:

Direct material cost is “The cost of materials entering into and becoming constituent elements of a product or saleable service”. Thus, materials which can be identified with units of output or service are known as direct materials.

Cotton used in production of cloth, leather used in the case of production of leather goods and lime in the production of chalk, etc., are the examples of direct materials. Any materials purchased and used for a specific job are also direct materials.

(ii) Indirect Materials:

Materials used for the product other than the direct materials are called indirect materials. In other words, materials cost which cannot be identified with a specific product, job, process is known as indirect material cost.

Small tools, stationery used in works, office stationery, advertising posters, and materials used in maintenance of plant and machinery are a few examples of indirect materials.

Element # 2 Labour:

Labour is the remuneration paid for physical or mental effort expended in production and distribution.

“The labour cost is the cost of remuneration (wages, salaries, commissions, bonus, etc.) of the employees of an undertaking” – I.C.M.A

Labour cost is also divided into direct and indirect portions:

(i) Direct Labour Cost:

It is also called ‘Direct-wages’. Direct labour cost is the cost of labour directly engaged in production operations. E.g., workmen engaged in assembling parts, carpenters engaged in furniture making, etc.

(ii) Indirect Labour Cost:

Indirect labour cost is the remuneration paid for labour engaged to help the production operations, e.g., inspectors, watchmen, sweepers, store keepers, etc. The remuneration paid to these persons cannot be traced to a job, process or production order. The labour costs of idle time, overtime, holidays, etc., are also taken as indirect costs. Similarly, clerical and managerial staff, salesmen, distribution employees are also included in the orbit of ‘indirect labour’.

Element # 3 Expenses:

Expenditure other than material and labour is the third element of cost.

It is defined by I.C.M.A. As- “The cost of service provided to an undertaking and the notional cost of the use of owned assets”.

Expenses are of two types:

(i) Direct expenses, and

(ii) Indirect expenses.

(i) Direct Expenses:

These are the expenses which can be directly identified with a unit of output, job, process or operation. They are specifically incurred for a job, or unit or process and in no way they are connected with other jobs or processes. The direct expenses are also known as chargeable expenses.

Some examples are:

(a) Hire charges of special plant used for a job.

(b) Royalty on products.

(c) Cost of special patterns, designs or plans for a particular job or work order, etc.

(ii) Indirect Expenses:

Indirect expenses are expenses other than indirect material and indirect labour, which cannot be directly identified with units of output, job, process or operation. These expenses are incurred commonly for jobs and processes. E.g., rent, power, lighting, depreciation, bank charges, advertising, etc.

Direct and Indirect Costs:

Direct Cost or Prime Cost:

The aggregate of all the direct costs i.e., Direct Materials, Direct Labour or wages and Direct expenses is termed as- ‘Prime Cost’ or ‘Direct cost’. Thus prime cost or direct cost is the sum of all the elements of costs which can be specifically identified with particular products or jobs and allocated to such output.

Indirect Cost or ‘Overhead’ or ‘On Cost’ or ‘Burden’:

The aggregate of all the indirect costs i.e., Indirect Material, Indirect labour and Indirect expenses is variously termed as ‘On cost’ or ‘overhead’ or ‘Burden’. Over heads or on cost or indirect cost cannot be identified with specific products or jobs. So it is apportioned to the output on some reasonable basis.

I.C.M.A., defines overheads as follows:

“The aggregate of indirect materials cost, indirect wages cost (indirect labour cost) and indirect expenses”. I.C.M.A. Has stated in the note appended to this definition – ‘on cost’ and “Burden” as synonymous terms which are not recommended.

Elements # 4. Overhead:

On the basis of functions overhead is classified as:

(i) Factory overhead

(ii) Administration or office overhead, and

(iii) Selling and Distribution overhead.

(i) Factory Overhead:

This is the aggregate of indirect material, indirect wages and indirect expenses incurred in the factory. Examples of indirect factory expenses are rent, power, depreciation lighting and heating incurred in the factory.

(ii) Administration or Office Overhead:

All the indirect administration expenses, come under this category. Salaries of office staff, accountants, directors’ fees, rent of office building, stationery expenses incurred in the office lighting and bank charges, etc., are the examples.

(iii) Selling and Distribution Overhead:

This includes indirect selling and distribution expenses. Examples are salaries of salesmen, selling commission, advertising, warehouse rent, maintenance of delivery vans, warehouse staff expenses, warehouse lighting, etc.

Expenses Excluded from Costing:

The following items are excluded from computation of total cost:

(a) Capital Costs and Capital Losses- Purchase of fixed assets, plant and machinery, building, etc. Loss on sale of fixed assets, abnormal losses, preliminary expenses, patents written off, etc.

(b) Transfer to reserves, income tax, dividend, bonus to shareholders, etc.

(c) Financial items like, cash discount, interest on debentures, interest on loans, interest on own capital, etc.

Q12) How do managers use cost behavior patterns to make better decisions? (5 marks)

A12) Accurately predicting what costs will be in the future can help managers answer several important questions. For example, managers at Bikes Unlimited might ask the following:

We expect to see a 5 percent increase in unit sales next year. How will this affect revenues and costs?

We are applying for a loan with a bank, and bank managers think our sales estimates are high. What happens to our revenues and costs if we lower estimates by 20 percent?

1. Fixed costs remain static or constant no matter changes in output. Fixed costs are associated with time.

Theoretically, variable costs remain constant per output unit, and glued costs remain constant per total or unit time. Within the end of the day , these concepts don't apply. A comprehensive definition of variable costs should include costs that tend to fluctuate with output, or costs that have a serious relationship with output, and glued costs tend to be constant across production volumes. With output that ought to include costs, or costs that aren't significantly related.

2.  Semi-variable costs don't change proportionally or remain static. For instance . i will be able to repair it.

3.  Step cost is that the cost of jumping to a replacement level because the activity changes, fixed over the scope of the activity.

Based on features: Enterprises got to perform many features and see the value of every of those features. The subsequent may be a brief description of every feature cost.

The Chartered Institute of Management Accountants (CIMA), London defines various functional costs as follows:

(i) Manufacturing / cost. the value of operating a company's manufacturing department is that the manufacturing cost. This includes costs from the availability of materials, labor and services to the first packaging of the merchandise. Therefore, it includes direct material costs, direct labor costs, direct costs and factory overhead costs.

(ii) Management fee. Management costs are the prices of policymaking, organizational command, and operational management that aren't directly associated with production, sales, distribution, research, or development activities or functions.

(iii) Selling expenses. the value of pursuing demand generation and stimulus (sometimes called marketing) and securing orders.

(iv) Distribution costs. the value incurred from having the ability to ship the packaged product to having the ability to use the readjusted returned empty package, if any. Distribution costs also include expenses incurred to maneuver goods to and from prospects, as within the case of sales or returns.

(v) Research expenses. The value of checking out new or improved products, new applications of materials, or new or improved methods.

(vi) Development cost. the value of creating a choice to supply a replacement or improved product, or the choice to adopt a replacement or improved method by that method, until the formal production of that product begins, is that the cost of development.

(vii) Pre-manufacturing cost. Of the event costs from prototype to production, that part is that the prototype cost. This is often treated as a deferred revenue expense and is recorded in future production costs.

Q13) What is meant by “cost centre”? What is the different type of cost centres? (5 marks)

A13)  It is defined as a location, person or an item of equipment (or group of these) for which cost may be ascertained and used for the purpose of Cost Control.

Definition of Cost Centre:

According to E. L. Kohler, a cost centre is “an organisational division, department or self-division, a group of machines, men or both. It includes any unit of activity into which a manufacturing plant or other operating organisation is divided for purposes of cost assignment and allocation”.

Similarly, according to the Terminology of CIMA, London, a cost centre “is a location, person or item of equipment or group of these, for which cost may be ascertained and used for the purpose of cost control.”

Thus, a Cost Centre covers a location (e.g., a department, person—e.g., machine operator), and a item of equipment (e.g., plant/machine).

Types of Cost Centre:

(a) Personal Cost Centre:

When a Cost Centre deals with a person or group of persons, it is known as Personal Cost Centre.

(b) Impersonal Cost Centre:

When a Cost Centre deals with a location or equipment or both, it is called Impersonal Cost Centre.

(c) Production Cost Centre:

When a Cost Centre deals with a product/manufacturing work e.g. Machine shop, it is called Production Cost Centre.

(d) Service Cost Centre:

When a Cost Centre deals with or is engaged in rendering services to the Production Cost Centre, it is called Service Cost Centre.

(e) Operation Cost Centre:

It is applicable in case of manufacturing concerns. It consists of machines or persons which follow similar activities.

(f) Process Cost Centre:

It is also applicable in case of manufacturing concerns. Process Cost Centre is applied in case of particular or specific process of a manufacturing enterprise.

Purposes of Cost Centre:

The purposes of Cost Centre are:

(i) Cost Centre brings responsibility and, as such, it is also called Responsibility Centre. In other words, for controlling cost of a centre, the manager of that cost centre is, no doubt, responsible for the purposes.

(ii) Cost Centre helps to recover the overhead expenses

Cost Centers are of two types:

Personal Cost Centre: It consists of a person or group of persons e.g. Mr. X, supervisor, foreman, accountant, engineer, process staffs, mining staffs, doctors etc.

Impersonal Cost Centre: It consists of a location or an item of equipment (or group of these) e.g., boiler house, cooling tower, weighing machine, canteen, and generator set etc.

Cost Centres in a manufacturing concern are of two types:
Production Cost Centre: it is a cost centre where raw material is handled for conversion into finished products. Here both direct and indirect expenses are incurred. Machine shops, welding shops and assembly shops etc. are examples of production cost centres.
Service Cost Centre: It is a cost centre which serves as an ancillary unit to production cost centre. Payroll processing department, HRD, Power house, Gas production shops, Plant maintenance centres etc. are example of service cost centres.

Q14) Distinguish between (5 marks)
(i) Profit Centres and Investment Centres.
(ii) Product Cost and Period Cost.

A14) What is a Profit Center?

A profit center is a division or a branch of a company that is considered to be a standalone entity. A profit center is responsible for generating its own results where the managers generally have decision-making authority related to the product, pricing, and operating expenses. Managers in a profit center are involved in all decisions relating to revenues and costs, except for investments. Decisions regarding investments such as acquiring or disposing capital assets are taken by the top management in corporate headquarters. Having profits centers makes it convenient for the top management to compare results and to identify to what extent each profit center contributes to corporate profits.

E.g. JKT Company is a multinational company that produces high-end cosmetic products. JKT operates in 20 countries around the world. Cosmetics are produced in manufacturing plants located in all 20 countries. Each operation in respective countries is operated as profit centers where the divisional managers are responsible for all revenue and cost related decisions.

The concept of profit centers enables the company’s management to decide how best to allocate its resources to maximize profitability by,

1. Allocating more resources to high profit making entities
2. Improve the performance of loss-making units
3. Discontinue entities that do not have future potential

What is an Investment Centre?

An investment center is a profit center that is responsible for making investment decisions in addition to revenue and cost related decisions. Investment centers are business units that can utilize capital to directly contribute to a company’s profitability. Businesses have to make various decisions regarding investing in capital assets that enable long-term viability. These include decisions to purchase, dispose and upgrade capital assets. Continuing from the same example,

E.g. In addition to decisions regarding revenues and costs, divisional managers in JKT have the authority to decide which new capital assets to purchase, which ones should be upgraded and the ones that should be disposed.

The main evaluation criterion for an investment center is to assess how much revenue it generates as a proportion of its investment in capital assets. Companies can use one or a combination of the following financial metrics to evaluate the performance of an investment center.

Return on Investment (ROI)

ROI allows calculating how much returns are made compared to the amount of capital invested and calculated as,

ROI = Earnings before interest and tax (EBIT)/ Capital Employed

Residual Income (RI)

RI is a performance measure normally used to assess the performance of business divisions, in which a finance charge is deducted from the profits to indicate the usage of assets. Formula for calculating RI is,

Residual Income = Net Operating Profit – (Operating Assets* Cost of Capital)

Economic Value Added (EVA)

EVA is a performance measure normally used to assess the performance of business divisions, in which a finance charge is deducted from the profits to indicate the usage of assets. EVA is calculated as,

EVA = Net operating profit after tax (NOPAT) – (Operating assets* Cost of capital)

(i) Profit Centres and investment centres
A profit centre is a centre where the manager has the responsibility of generating and maximising profits. In such centres, the manager is responsible for revenue and cost.
Investment centres are those centres which are concerned with earning an adequate ROI. In such centres, the manager is responsible for investment, revenue and cost.

(ii) Product costs and period costs
Product costs are costs which are associated with purchase and sale of goods. These are costs are used for inventory valuation and incurred up to factory stage.
Period costs are costs, which are not assigned to the products but are charged as expenses against revenues of the period in which they are incurred e.g., Selling, General Administrative and Distribution overheads.

Q15) Explain ‘Cost Unit’ and ‘Cost Centre’? (8 marks)

A15)

1. Cost Units: It is a unit of product, service or time (or combination of these) in relation to which costs may be ascertained or expressed.

We may for instance determine the cost per tonne of steel, per tonne kilometre of a transport service or cost per machine hour. Sometime, a single order or a contract constitutes a cost unit. A batch which consists of a group of identical items and maintains its identity through one or more stages of production may also be

Considered as a cost unit.
 

Cost units are usually the units of physical measurement like number, weight, area, volume, length, time and value.

After costs have been ascertained, accumulated, classified, and recorded, they must be related to a convenient measure of the quantity of the product or service. This measure of the quantity of a product or service is known as the cost unit.

A cost unit is defined as “a unit of quantity of product, service, or time (or a combination of these) in relation to which costs may be ascertained or expressed.” In other words, a cost unit is a standard or unit of measurement of the goods manufactured or services rendered. 

A cost unit may be expressed in terms of number, lenth, area, weight, volume, time, or value.

Characteristics of a Cost Unit

A unit of cost must possess the following characteristics:

1. It must be one that expenditure can be conveniently associated with.
2. It must be appropriate or natural to business operations and the product.
3. It must be certain or definite and not change over time.
4. It must be simple to understand and to quote.
5. It must be universally accepted.

Types of Cost Units

Cost units can be categorized as follows:

Simple Unit: These use a single standard or unit of measurement of the goods manufactured (e.g., per piece, per kilogram, per quintal, per ton, per gallon, or per meter).

Composite Unit or Complex Unit: These combine two simple units (e.g., per passenger-kilometer, per ton-kilometer, or per kilowatt-hour).

The terms of measurement used in cost units are:

1. Number
2. Area
3. Volume
4. Length
5. Weight
6. Time
7. Value

Cost units are always selected carefully based on the nature of business operations.

For instance, the cost unit of steel is naturally ascertained in terms of per ton. Similarly, the cost unit of carrying a passenger by a transporter is naturally ascertained in terms of the distance traveled in kilometers.

2.Cost Centre: It is defined as a location, person or an item of equipment (or group of these) for which cost may be ascertained and used for the purpose of Cost Control.

It is defined as a location, person or an item of equipment (or group of these) for which cost may be ascertained and used for the purpose of Cost Control.

Definition of Cost Centre:

According to E. L. Kohler, a cost centre is “an organisational division, department or self-division, a group of machines, men or both. It includes any unit of activity into which a manufacturing plant or other operating organisation is divided for purposes of cost assignment and allocation”.

Similarly, according to the Terminology of CIMA, London, a cost centre “is a location, person or item of equipment or group of these, for which cost may be ascertained and used for the purpose of cost control.”

Thus, a Cost Centre covers a location (e.g., a department, person—e.g., machine operator), and a item of equipment (e.g., plant/machine).

Types of Cost Centre:

(a) Personal Cost Centre:

When a Cost Centre deals with a person or group of persons, it is known as Personal Cost Centre.

(b) Impersonal Cost Centre:

When a Cost Centre deals with a location or equipment or both, it is called Impersonal Cost Centre.

(c) Production Cost Centre:

When a Cost Centre deals with a product/manufacturing work e.g. Machine shop, it is called Production Cost Centre.

(d) Service Cost Centre:

When a Cost Centre deals with or is engaged in rendering services to the Production Cost Centre, it is called Service Cost Centre.

(e) Operation Cost Centre:

It is applicable in case of manufacturing concerns. It consists of machines or persons which follow similar activities.

(f) Process Cost Centre:

It is also applicable in case of manufacturing concerns. Process Cost Centre is applied in case of particular or specific process of a manufacturing enterprise.

Purposes of Cost Centre:

The purposes of Cost Centre are:

(i) Cost Centre brings responsibility and, as such, it is also called Responsibility Centre. In other words, for controlling cost of a centre, the manager of that cost centre is, no doubt, responsible for the purposes.

(ii) Cost Centre helps to recover the overhead expenses

Cost Centers are of two types:

Personal Cost Centre: It consists of a person or group of persons e.g. Mr. X, supervisor, foreman, accountant, engineer, process staffs, mining staffs, doctors etc.

Impersonal Cost Centre: It consists of a location or an item of equipment (or group of these) e.g., boiler house, cooling tower, weighing machine, canteen, and generator set etc.

Cost Centres in a manufacturing concern are of two types:
Production Cost Centre: it is a cost centre where raw material is handled for conversion into finished products. Here both direct and indirect expenses are incurred. Machine shops, welding shops and assembly shops etc. are examples of production cost centres.
Service Cost Centre: It is a cost centre which serves as an ancillary unit to production cost centre. Payroll processing department, HRD, Power house, Gas production shops, Plant maintenance centres etc. are example of service cost centres.

Cost Centres are of two types:

1. Personal Cost Centre: It consists of a person or group of persons e.g. Mr. X, supervisor, foreman, accountant, engineer, process staffs, mining staffs, doctors etc.
2. Impersonal Cost Centre: It consists of a location or an item of equipment (or group of these) e.g. Boiler house, cooling tower, weighing machine, canteen, and generator set etc.

OR

Cost Centres in a manufacturing concern are of two types:

3.             Production Cost Centre: it is a cost centre where raw material is handled for conversion into finished products. Here both direct and indirect expenses are incurred. Machine shops, welding shops and assembly shops etc. are examples of production cost centres.

4.             Service Cost Centre: It is a cost centre which serves as an ancillary unit to production cost centre. Payroll processing department, HRD, Power house, Gas production shops, Plant maintenance centres etc. are example of service cost centres.

Q16) Narrate the objectives of Cost Accounting. (8 marks)
A16) Widespread interest in the subject of costing can be said to have developed in the Industrial Revolution, which began in 1760. As the factory system was followed by mechanization, simplification, standardization and mass production, costing had to keep up with these developments. Until the 18th century, costing was in the area of Engineers. Integration with financial accounting began when accountants began to audit cost records. Under the influence of financial accountants, costing came to be seen almost exclusively as a means of inventory valuation and profit measurement.

Costing has been found to assist in managing when compiling and providing the required statistical data.  It has developed rapidly and assisted management of providing valuable information to take appropriate decisions in time. Costing sheds light on excessive waste of materials, inefficient labor operations, idle machinery and many other similar factors that are responsible for the reduction of profits in business activities. Management has found that costing can provide valuable assistance in planning, managing and coordinating activities.

Definitions

Costing:

The Society of cost control accountants (ICMA) London defines costing as a confirmation of costs, and costing includes the technology and process of confirming costs.

Cost accounting:

The Society of cost management accountants (ICMA) in London defines cost accounting as"the science, art and application of the principles, methods and techniques of cost accounting and cost accounting to the practice of cost management and confirmation of profitability, as well as the presentation of information for the purpose of management decision making". Therefore, cost accounting includes costing, costing, Budget Control, cost control, and cost audit. Costing refers to the process of determining and accounting for the cost of a particular product or activity. It also includes classification, analysis and guessing the production of costs.

Costing:

I.C.M.A. London defines costing as"the process of accounting for costs from the time when expenditures occur or from the time when they are committed to establishing the ultimate relationship with cost centers and cost units."

In practice, costing, costing, and cost accounting are often used interchangeably. Cost accounting refers to the confirmation of costs, the accumulation and measurement of costs of activities, processes, products or services. Cost data is used to create costing sheets or cost sheets. Costing is a professional Department of accounting that helps manage costs to control and create awareness of the importance of costs to the well of the business organization. Managing a business to achieve its objectives requires systematic and useful cost data and reporting.

Cost center:

A cost center is a place, person or asset that can be checked for costs and used for cost management purposes. This is an organizational segment or area of activity that is used to accumulate costs. The different types of cost centers used in manufacturing organizations are personal cost Cantor, impersonal cost center, work cost center and process Center.

Cost accounting goals are usually used to indicate activities in which costs must be determined individually. Activities can be functions for which data is required, sub-divisions of the organization, contracts or other units of work. There is a direct relationship between the information needs of management, the purpose of costing, the technologies and tools used for analysis in costing. Therefore, costing has the following purposes-

The main objectives of introduction of a Cost Accounting System in a manufacturing organization are as follows:

(i) Ascertainment of cost: The main objective of a Cost Accounting system is to ascertain cost for cost objects. Costing may be post completion or continuous but the aim is to arrive at a complete and accurate cost figure to assist the users to compare, control and make various decisions.
 

(ii) Determination of selling price: Cost Accounting System in a manufacturing organization enables to determine desired selling price after adding expected profit margin with the cost of the goods manufactured.
 

(iii) Cost control and Cost reduction: Cost Accounting System equips the cost controller to adhere and control the cost estimate or cost budget and assist them to identify the areas of cost reduction.
 

(iv) Ascertainment of profit of each activity: Cost Accounting System helps to classify cost on the basis of activity to ascertain activity wise profitability.
 

(v) Assisting in managerial decision making: Cost Accounting System provides relevant cost information and assists managers to make various decisions.

Q17) Explain the area of cost reduction at product design stage. (8 Marks)

A17) Products design offers the greatest scope of cost reduction of a permanent nature. The impact of a decision made at the beginning stage on costs can be revealed at every stage of manufacture or processing of the product in the factory. The design function, therefore, offers an extremely important area for cost reduction action.

Before making new designs, a design policy has to be settled by top management. The design policy may be selected towards objectives such as:

(a) Low cost and functional efficiency

(b) Widest possible application

(c) Quality and life and

(d) Appearance.

Any attempt to achieve cost reduction through design economies may come into conflict with the overriding design policy and hence a firm policy concerning design has to be settled by overcoming, as far as possible, conflicts.

Potential areas for cost reduction in the field of design are:

(i) Introduction of new designs

(ii) Improvement in the existing designs and

(iii) Standardization and simplification

Maximizing quality while minimizing cost is the main goal of any product commercialization specialist. Such a feat is the crux of any competitive product-providing business and is pivotal to a company’s vertical expansion.

Production costs are often contingent on many factors and finding the right ones to cut without damaging your product along with your business’s reputation is no small feat.

Here, we’ll cover a few great tips to reduce your manufacturing costs on new designs and prototypes without hurting your market offering. But first, we’ll shed some light on the CAD design process itself so you know what to expect.

Designing and engineering, as they pertain to product development, can be thought of as two separate processes of equal importance. Both can be handled by the same team or person and are essentially intertwined.

Designing a Product

Product design can be considered a far more artistic aspect of product development than engineering. The design process concerns itself with the aesthetic qualities desired, functionality required, and regulations to be met. In short, it can be described as follows:

Identifying a Problem

This pivotal first step in product design is largely handled by the company as opposed to the hired designer. Market research and surveying can likely provide you with all of the information you may need to handle this step on your own.

Solving the Problem

It is here that designers typically come into the picture. From your key ideas, designers visually develop a product capable of solving the problem you’ve identified.

Refining the Solution

This is the iterative phase of every product’s ongoing development. In effect, this stage of the product’s design may never truly come to a close. Over time, tweaks and improvements are almost entirely inevitable and the product you begin producing may not look anything like its refined counterpart from the future.

Product Engineering

This part of the product development process deals with the creation of a production system for the item in question. Product engineers may not necessarily concern themselves with details such as an item’s utility or appearance, but instead concentrate the bulk of their efforts on creating a safe, reliable specification for crafting your product.

The design process provides plenty of wiggle room for production price considerations. In fact, this process often determines over 50% of your product’s final manufacturing price. In contrast, the cost of a quality product design is negligible, estimated at a mere 5% of total expenses in the production process.

Due to the reasons stated above, maximizing product profitability is best done at this stage of development, before engineering tasks are tackled at all. Here are a few cost-management tips for minimizing the costs of manufacturing services as your product takes shape:

1. Design for Manufacturing

Designing for manufacturing is a specialized approach to designing that prioritizes ease of product creation over other factors. However, despite centering on the ease with which an item can be manufactured, this technique is particularly helpful for minimizing costs across the board. After all, manufacturing costs are mostly contingent on the relative difficulty of crafting your product.

This approach changes depending on the product and manufacturing processes you apply it to, but physical products share similar requirements. To begin effectively designing a physical product for manufacturing, you’ll need to take the key points that follow into consideration:

Minimize Set-Up (Fixturing or Tooling)

Set-up or fixturing is the process of physically flipping a part during the building process. This applies largely to CNC machining and can be the cause of significant price discrepancies due to relatively small design flaws.

To optimize this part of the production process, you should focus on developing a product design that can be built with minimal flipping and re-orientation during machining.

Use the Ideal Form of Your Chosen Material

The many types of plastics, metals, and other materials you have to choose from present diverse challenges and benefits in the production process, but an often overlooked aspect of choosing materials is the form they come in.

Once an appropriate metal has been chosen, for instance, differentiating between its bar, sheet, and plate forms can help to drastically cut costs, as certain forms are often cheaper than others.

Use Proper Part Tolerances

A manufactured part’s tolerance is the degree to which its exact dimensions can vary without it becoming unusable. Small differences in size creep into most manufactured products, but big differences are usually inexcusable.

Specifying a high degree of precision as necessary for each of your product’s parts may seem ideal, but this is a surefire way to blow up the price. Instead, aim for a functional blend of high precision parts with low tolerance and low precision parts with high tolerance.

1. High precision pieces are usually those that require further assembly or attachment to each other.
2. Low precision pieces tend to be outer coverings and standalone parts that require no precise connections to other parts.

2. Consider the Materials

Material options are vastly varied in modern manufacturing and each has a host of characteristics worth keeping in mind as your product is designed. There’s much more to materials than available form factors. Here are a few key points to keep in mind:

1. Consider Material Finishes

Accounting for different pricing for certain material finishes helps to gauge the overall cost of your product’s manufacturing process.

Injection moulds, for example, can be polished to varying degrees, each more expensive than the last. This defines the upfront price for mold tooling but will not apply to individual parts once production begins.

Choosing less refined finishes ensures lower tooling prices and might not negatively affect your finished product’s appearance. The effect is far more pronounced if your product is to be produced through the use of CNC machining as individual parts will require finishing.

2. Minimize Manufacturing Waste

Waste of any kind in the manufacturing process is costly. Lean manufacturing as a concept centers on the elimination of such wasteful aspects of production as defective products, scrap material, and industrial byproducts.

A simple rule of ten suggests that problems compound by ten as they progress through each stage of a product’s development, from design to delivery. Issues with waste can be handled before your product leaves the design phase of its development, helping to cut costs down the line.

Defective products can be caused by failings on the manufacturer’s side of the equation, but design plays a significant role as well. Your best bet to avoid this while still in the design phase is active collaboration with a manufacturing engineer to ensure specific details that increase the likelihood of defective products being created are handled early on.

Scrap material is any material leftover after a product or group of products have successfully been built. Tackling this issue during the design stage of your product’s development often comes to setting higher tolerances for parts that are neither functionally nor aesthetically critical. As was mentioned above, high tolerance and low precision make for cheaper production. They also make for less scrap material being removed to account for especially specific sizing, etc.

Another scrap reduction option is the inclusion of as many individual parts per piece of material as is safely possible. In injection molding, this means creating molds capable of producing the maximum number of parts in a single shot.

3. Consider Hollow Structural Options

In injection molded products and parts, the thicker the wall of the part, the higher the chance of problems arising during production. All manner of defects can creep into thick walls in this type of production process, severely affecting production costs by making the overall process more complex.

Clever design techniques minimize these kinds of risks by adopting the use of structural elements such as ribs and gussets, which provide significant strength improvements in thin-walled parts without the difficulties associated with thicker walls.

Apart from minimizing defects in production, using hollow structures for a product wherever possible allows for less material overall to be used to produce each part. Less material makes for lower expenses. If your parts are being injection molded, then less material also equals less cooling time per piece, which compounds the potential for savings.

4. Keep Physical Prototyping to a Minimum

Reducing Manufacturing Costs Simulation

Physical prototypes are an essential part of any product’s development process, but relying on them too heavily can cost you quite a lot of money.

Through the use of iterative CAD development, you can work out a lot of the kinks in your product before you need a physical prototype at all. Software-aided performance tests reinforce this possibility with specialized options available to separate industries for stress testing parts and materials with high accuracy.

Q18) Discuss cost classification based on variability and controllability. (5 marks)
 

A18) The idea of cost accounting is to collect, classify, record, and suitably allocate expenditures to determine the costs of products or services. After collecting costs, these are classified to ensure their identification with cost centers or cost units. 

Costs have different features or characteristics, and they are grouped or classified based on their common characteristics. The process of grouping costs based on their common characteristics is known as ‘classification of cost‘.

Different Classes of Cost

The groups that costs are classified into are known as ‘classes. Costs can be classified using different bases or characteristics, including element, nature, variability, controllability, normality, and function. The main classes of cost are shown in the image below.

Cost classification based on variability
 

Fixed cost – these are costs, which do not change in total despite changes of a cost driver. A fixed cost is fixed only in relation to a given relevant range of the cost driver and a given time span. Rent, insurance, depreciation of factory building and equipment are examples of fixed costs where the final product produced is the cost object.
 

Costs (both direct and indirect) can also be classified into the following groups based on their behavior relative to changes in the volume of activity:

• Variable costs

1. Fixed costs
2. Semi-variable or semi-fixed costs

Variable costs are costs that vary in a directly proportional way to changes in the volume of output or sales. These costs tend to increase or decrease with the rise and fall in production or sales. Variable costs vary in total but their per-unit cost stays the same. 

Examples of variable costs are direct material cost, direct wages, direct expenses, consumable stores, and commission on sales.

Fixed costs are costs that generally remain unaffected by changes in the volume of output or sales. In other words, fixed costs remain unchanged when output or sales increase or decrease. These costs remain fixed in total but their per-unit cost changes with changes in output or sales.

These costs depend mainly on the passage of time and do not vary directly with the changes in the volume of output or sales. Typical examples of fixed costs include rent, rates, taxes, insurance charges, and salaries for managers.

It is worth remembering that fixed costs are not absolutely fixed for all of time. In fact, fixed costs are fixed only in relation to a particular level of production capacity.

Semi-variable costs are costs that tend to vary with changes in the volume of output or sales, but which do not vary in a directly proportional way relative to such changes. These costs have the characteristics of both fixed and variable costs. 

One part of semi-variable costs remains constant irrespective of changes in the volume of output or sales. By contrast, the other part varies in proportion to changes in the volume of output or sales. 

Typical examples of semi-variable costs include repairs and maintenance costs for plants, machinery, and buildings and supervisor salaries.

Cost classification based on controllability
Controllable costs – are incurred in a particular responsibility center and relate to a defined time span. They can be influenced by the action of the executive heading the responsibility center e.g., direct costs.

Uncontrollable costs – are costs which are not influenced by the action of the responsibility manager e.g. Expenditure incurred by the tool room is controllable by the foreman in charge of that section, but the share of tool room expenditure which is apportioned to the machine shop is not controllable by machine shop foreman.

Q19) Briefly explain the essential features of a good cost accounting system. (8 marks)

A19) Cost Accounting is a conscious and rational procedure by Accountants for accumulating costs and relating such costs to specific products or departments for effective management action.

Cost Accounting establishes budgets, standard costs and actual costs. Cost Accounting is a set of procedures used in refining raw data into usable information for management decision making, for ascertainment of cost of products and services and its profitability.

Cost accounting is a Management Information System which analyses past, present and future data to provide the basis for managerial decision making. Cost Accounting is a system of foresight and not a postmortem examination, it turns losses into profits, speeds up activities and eliminate wastes.

A Cost Accounting System that simply records costs for the purpose of fixing sale prices has accomplished only a small part of its mission. Cost Accounts are keys to economy in manufacture and are indispensable to the intelligent and economical management of a factory. Cost Accounting is becoming more and more relevant in the ever growing economic scenario. Cost Accounting becomes an important aid to modern management.

Necessity for Cost Accounting System:

A company having a proper cost accounting system will help the management in the following ways:

1. The analysis of profitability of individual products, services or jobs.

2. The analysis of profitability of different departments or operations.

3. The analysis of cost behaviour of various items of expenditure in the organization. This will help in future cost estimation with reasonable accuracies.

4. It locates differences between actual results and expected results. Such differences can be also traced to the individual cost centres with the efficient cost system.

5. It will assist in setting the prices so as to cover costs and generate an acceptable level of profit.

6. The effect on profits of increase or decrease in output or shutdown of a product line or department can be analyzed with by adoption of efficient Cost Accounting System.

7. The costing records serve to analyze the final accounts of a company i.e., the manufacturing, trading and profit and loss accounts, in such a way as to give a detailed explanation of the sources of profit or loss.

8. Cost Accounting data generally serves as a base to which the tools and techniques of Management Accounting can be applied to make it more purposeful and management oriented.

9. The cost ascertainment, allocation, distribution can be efficiently made under efficient costing system.

10. Cost records are the base for the Management Information Systems.

11. The Cost System generates regular performance statements which management need for control purposes.

12. Cost Accounting System is not only applicable to manufacturing organizations or functions but also extended to service organizations and functions.

13. Cost comparisons between different departments, machines and alternative processes help management to maintain maximum efficiency is possible with the adoption of efficient Costing System.

14. The costing information will help in making reliable estimates and will also help in submission of tenders.

15. Costing checks recklessness and avoids occurrence of mistakes.

16. It provides invaluable aid to management in performing its functions of planning, evaluation of performance, control and decision making.

17. It facilitates delegation of responsibility for important tasks and rating of employees.

18. It enables to distinguish profitable and non-profitable activities.

19. It helps in determination of break-even point i.e. the level of activity where the firm reaches no profit no loss situation.

20. It aids in determining and enhancing levels of efficiency and eliminates wastage of men, materials, machines and money. All sorts of wastages are also minimized.

21. The costing information will find a way out in periods of trade depression and competition.

22. It provides data for preparation of periodical Profit and Loss Account.

23. It facilitates the assessment of Excise duty, Customs duty, Income-tax.

24. It helps the government in formulation of policies regarding industry, import, export, taxation, etc.

25. It helps the government in fixation of administered prices, tariff protection, wage level fixation etc.

26. The Costing System will aim at increase in operational efficiency and cost reduction, which helps the consumers in getting reduced prices.

27. It discloses the relative efficiencies of different workers which facilitate to frame suitable wage/reward policies.

28. The efficiency of public enterprises can be compared with the private sector if cost data is available.

29. The operation of Cost System enables Cost Audit which will bring out inefficiencies and frauds.

30. Basing on cost information, the limited resources will be allocated to maximize profitability of the organization.

31. Reliable capital investment decisions can be taken if it is supported with cost data.

3. Reports Provided by Cost Accounting Department:

The Cost Accounting Department of a big manufacturing company provides various reports to its executives as part of management information system.

Some of such reports are:

(a) Cost sheets,

(b) Material consumption reports,

(c) Inventory reports,

(d) Labour utilization report,

(e) Idle time reports,

(f) Labour turnover reports,

(g) Overhead reports,

(h) Capacity utilization reports,

(i) Production reports,

(j) Spoilage and defective report,

(k) Statements of Comparison with budgets,

(l) Statements of comparison with standards,

(m) Statement of reconciliation of financial accounts and cost accounts,

(n) Segmental profitability report,

(o) Product-wise profitability report,

(p) Statement of apportionment of overheads,

(q) Statements of sales affected compared with budgets,

(r) Statement of expenses on research and development compared with budgeted amounts.

4. Essentials of Good Cost Accounting System:

A good Costing System will consist of the following characteristics:

(a) The Costing System adopted in a particular organization must suit its nature and size of business and its information needs.

(b) The Costing System must be economical to the organization and the benefits derived from the system should be more than its cost of installation and operation.

(c) The system should be more flexible enough to take care of changing business situations and information needs of the organization.

(d) The system should be simple to understand and easy to operate. The users of costing data should be convinced of the Costing System from which the data is derived.

(e) The Costing System should be devised with the coordinated efforts of all the concerned departments and their staff. This will reduce the difficulty in implementation of Cost System.

(f) The Costing System should ensure proper accounting for materials, labour and overheads and proper classification of transactions should be done at the level of recording.

(g) Adoption of Activity Based Costing System will increase the accuracy in allocation, appor­tionment and absorption of overheads, which leads to correct ascertainment of cost per unit of product or service.

(h) Integration of Financial Accounting and Cost Accounting Systems will avoid duplication of work. The financial and cost accounts should be interlocked together and should be reconciled periodically.

(i) The Costing System should clearly mention the details of records to be maintained and the degree of accuracy of data required.

(j) Before devising a Costing System, the need and objectives of the system should be identified.

(k) Since the Costing System is for internal control purpose, it should meet the requirements of management and its information needs.

(l) The Costing System should concentrate more on ascertaining the significant variables of the manufacturing unit which are amenable to control and affect the concern. For example, wages are amenable for control whereas marketing cost is situation oriented.

(m) Before a Costing System is devised and adopted, thorough study should be conducted on production process, methods of work, wage system, input requirements, information needs, financial accounting system etc.

(n) Wherever possible, concepts like Management by exception, Responsibility accounting etc. should be adopted into the Costing System.

(o) All forms and proforma should be adopted to minimize clerical work and formulate efficient system of material control and adequate wage procedure.

(p) The Costing System must take care of the importance of comparability of data, with previous period’s data, with competitors’ data, with industry averages.

(q) The costing system should fix-up the duties and responsibilities of Costing Department staff and the cooperation that can be sought from other functions/departments.

5. Essential Factors for Good Cost Accounting System:

In designing and installation of a good Cost Accounting System, the following factors should be given due consideration:

(a) The information needs of the management and the level of details needed.

(b) The frequency of the information to be provided.

(c) The factory layout and production process, method of production and type of process.

(d) The level of control to be exercised over production and cost centres.

(e) The nature of raw material and labour used in the process.

(f) The organization structure and degree of decentralization.

(g) The speed and accuracy in requirement of information.

(h) The information needs of different Cost centres.

(i) The relative size of the Cost units and Cost centres.

(j) The level of integration of Cost and Financial accounts desired.

(k) The requirement of uniformity of accounting for comparability of data with other units in the same industry.

(l) The level of mechanization and computerization needed.

(m) Standardization of records and accounting procedures and control systems.

(n) The level of application of Costing Techniques viz., standard costing, budgetary control and Marginal costing.

(o) Cost minimization without affecting the efficiency of information needs.

(p) The management’s intention and the cooperation of workers and staff needed in installation of Costing System

(q) Implementation of proper wage system and inventory valuation, stores issues.

(r) The cost behaviour and element-wise classification of costs and selection of equitable basis for allocation, apportionment and absorption of overheads.

(s) Cost Accounting System should be simple and easy to operate.

(t) The expenses of the Costing System should commensurate with the benefits of its installation.

6. Practical Difficulties in Installation of Cost Accounting System

The practical difficulties that are expected at the time of installation of Costing System, are summarized below:

1. Lack of Support from Top Management:

The basic objective of Cost Accounting System is to provide necessary information to the internal management for the purpose of problem solving, decision making and control. Without necessary support and recognition from the top management, the very purpose of Cost System is vitiated.

2. Resistance from Existing Accounting Staff:

The existing accounting staff may resist the introduction of Cost Accounting System in the organization due to fear of loosing job recognition and importance after the implementation of the system.

3. Lack of Cooperation from other Departments:

The employees of other departments may not cooperate for the installation of Cost Accounting System due to fear of increase in work load, bring-out inefficiency etc.

4. Resistance from Operating Level Workers:

The foremen, supervisors, workers and other operating level staff may resent the introduction of cost system on the ground that it will increase their job responsibilities and paper work and may fear that it may cause change in wage structure.

5. Shortage of Trained Staff:

The installation and implementation of cost system requires trained, qualified and experienced staff which may be shortage.

6. Uneconomical Cost System:

Sometimes the detailed cost system proposed to be installed may cause substantial installation and operating cost.

7. Suggestions to Overcome Practical Difficulties of Cost Accounting System:

The steps to be taken to avoid the above said practical difficulties while installations of a Cost System in the organization are as follows:

(a) The management should be convinced of the benefits which can derive by installation and operation of a Cost System.

(b) Non-cooperation and resistance can be overcome by explaining the simplicity and use of the system and should be ensured that the system will benefit the organization and increase its profitability. They should be given assurance that the system will not reduce the importance of existing staff.

(c) To overcome resistance, the existing staff should be properly trained to take up the responsibilities of the Costing System.

(d) All levels of staff and managers in the organization should be properly trained and made familiar with the Costing Procedures.

(e) The system should be simple to understand and easy to operate.

(f) The benefits derived from Cost System should be more than the costs incurred on its installation and operation.

(g) A qualified and experienced cost accountant should be assigned with responsibility to achieve the desired objectives of the Cost System. He should be capable of coordinating with other departments, and operating workers.

(h) The Cost System designed and installed should meet specific requirements of the concern and it should reduce unnecessary paper work of the organization.

(i) The accounting staff should be convinced that the Cost System will only supplement the Financial Accounting System and it is not going to reduce the importance of existing accounting function.

(j) Regular meetings with accounting staff and user departments will clarify all doubts about the system and eliminate ambiguity.

Essentials of a good Cost Accounting System: The essential features, which a good Cost Accounting System should possess, are as follows:

(a) Informative and Simple: Cost Accounting System should be tailor-made, practical, simple and capable of meeting the requirements of a business concern.

(b) Accuracy: The data to be used by the Cost Accounting System should be accurate; otherwise, it may distort the output of the system.

(c) Support from Management: Necessary cooperation and participation of executives from various departments of the concern is essential for developing a good system of Cost Accounting.

(d) Cost- Benefit: The Cost of installing and operating the system should justify the results.

(e) Precise Information: The system of costing should not sacrifice the utility by introducing meticulous and unnecessary details.

(f) Procedure: A carefully phased programmes should be prepared by using network analysis for the introduction of the system.

Q20) State the differences between Cost Centre and Cost Unit. (5 marks)

A20) The differences between Cost Centre and Cost Unit are as follows: