11/12/2020

concept of cost accounting

In the accounting records, the value of the building will be entered at its cost price, i.e. Cost accounting is a process of recording, analyzing and reporting all of a company’s costs (both variable and fixed) related to the production of a product. Those assets which are realized within a short time do not have this problem, e.g. Cost accounting is used by a company's internal management team to identify all variable and fixed costs associated with the production process. CAs, experts and businesses can get GST ready with ClearTax GST software & certification course. Cost accounting is a facet of management accounting that determines the actual cost associated with manufacturing a product or providing a service by looking at all expenses within the supply chain. ClearTax serves 2.5+ Million happy customers, 20000+ CAs & tax experts & 10000+ businesses across India. However, in case of non monetary assets, the cost concept extends to their accounting subsequent to acquisition, cost continues to be the basis for all the subsequent accounting for the asset. The cost incurred in selecting one option over another is called opportunity cost. Historical Cost; Verifiability Concept; In case where application of one accounting concept or principle leads to a conflict with another accounting concept or principle, accountants must consider what is best for the users of the financial information. Ltd. ClearTax offers taxation & financial solutions to individuals, businesses, organizations & chartered accountants in India. The cost of plastic is direct material cost. An exception to this statement is the diminution in value arising from the depreciation of assets. For example, a business buys a building worth $1,00,000 in cash. How to measure the acquisition cost of property, plant and equipment? Example: If you were not attending cost accounting class, you could be earning $25,00 per semester. The requirements of majority of them are satisfied by means of financial accounting. For a standard manufacturing unit the various costs involved can be segregated into the following : These can be further segregated into the following: Say a toy manufacturing unit procures plastic as a raw material. So while considering the profitability of toy ‘Dancing Monkey’ the organization has to consider the profit of ‘Spinning top’ that it forgoes. ClearTax is a product by Defmacro Software Pvt. To elaborate on this concept, if an asset does not cost anything, i.e. Compare cost accounting and management accounting? After four years, the value of the building goes up to $5,00,000. in case of inflation there will be an overstatement of net profit etc. Definition: Lower of cost or market, often abbreviated LCM, is an accounting method for valuing inventory. The cost of an item may well be different from its true value but since ascertainment of true value would be judgmental and therefore subjective, stating assets at historical cost is generally accepted as fairway of maintaining records. Cost accounting is the art and science of recording, classifying, summarizing, and analyzing costs with the objective of cost control, cost calculations and projections, and cost reduction, thereby helping management make prudent business decisions. Subsequently, the price of land shoots up—say, five years later the value of the land is twice the original cost. In short, cost accounting is a system of … Question: Describe the nature of the following costs and give reasons for your answers. This would introduce a degree of instability in the accounts which would considerably reduce their effectiveness and acceptance. Our GST Software helps CAs, tax experts & business to manage returns & invoices in an easy manner. It is comparison of all costs incurred after the process is performed. However, some accountants have argued that in today’s inflationary environment, the gaining popularity, as is evidenced by many large companies, who now prepare supplementary information after taking into account the changes in the purchasing power. 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. Financial accounting views an organization in entirety whereas cost accounting segregates the organization into various processes, projects or production units. What are the advantages/ objectives of a cost accounting system. The cost concept is one of the basic underlying guidelines in accounting and understanding which enables accountants to maintain the accuracy in the profession. An example of such a case would be the trade off between relevance and reliability. Cost accounting uses various techniques to make an organization cost effective. So the origin and evolution of cost accounting can be traced back to the industrial revolution. However, the accounting records would continue to show the value of the building at the cost price of $1,00,000 less depreciation. The position relating to the cost concept is best summarised as follows: Value, as used in accounts, signifies the amount at which an item is stated, in accordance with the accounting principles related to that item. Cost Accounting is a method of accounting wherein all the costs involved in performing any process, project or product are noted and analyzed. The different types are. However, suppose a piece of land is acquired by a business enterprise at a particular price and is accordingly, recorded as an asset in the books of accounts of the enterprise at that cost. Certain costs are incurred and cannot be recovered these are sunk costs. Compare it with ―Value‖ and ―Price‖? Thus, occasionally in the case of some fixed assets revaluation has to be done as a practical matter. It includes methods for recognizing, classifying, allocating, aggregating and reporting such costs and comparing them with standard costs." 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. no money is specifically paid for its acquisition, it would not be recorded in the books of accounts of the company. Cost accounting aims to report, analyze, and lead to the improvement of internal cost controls and efficiency. Cost accounting uses various techniques to make an organization cost effective. Accounting is the process of recording financial transactions pertaining to a business. Matching Concept. The cost principle requires that assets be recorded at the cash amount (or the equivalent) at the time that an asset is acquired. cash, government securities, amounts to be received from debtors, etc., because, in the case of these assets, their present values are practically identical with their acquisition cost. Concept of Cost Audit. If a building is purchased for $5,00,000, it will continue to appear in the books at that figure irrespective of its market value. So these organizations were more complex and dynamic. – Definition, Characteristics of Cost Concept of Accounting, Cost Concept and the Relevance Convention, Cost Concept, Analysis and Classifications MCQs, EPS and materiality concept of accounting, Journal entry for purchase of merchandise, Preparation of trial balance using balance method, Cash Flow Statement Practical Problems and Solutions, Company Final Acounts Practical Problems and Solutions, Underwriting of Shares Questions and Answers, Factory Overhead Practical Problems and Solutions, Important Techniques of Factory Overhead Costing, Labour Costing Practical questions with answers, Job Order Costing Examples, Practical Problems and Solutions, Cost of production report (CPR) questions and answers. There are also some limitations of this concept e.g. The cost concept can best be characterized by saying that for purposes of accounting, all transactions are recorded at their monetary cost of acquisition, i.e. Accordingly, the recording of assets at cost meets the convention of feasibility, the money paid to acquire an asset is easily ascertained and recorded without too much effort. The explanation of these concepts are as follows: Business Entity Concept: In accounting, business is treated as separate entity from its owners. Such analysis helps the management in taking strategic decisions. The primary one, of course, is that most people cannot agree on what is the present value of an asset while the price paid in terms of money as the acquisition cost of the asset is beyond dispute in most cases. Cost Accounting – Concept, Objectives, Types & Methods. Which are the elements of cost in general? Following the cost concept means that unless there are special reasons for doing otherwise cost of an item should be assumed to be its true value and that all accounting entries should be made at cost. DEFINITION OF COST ACCOUNTING An accounting system is to make available necessary and accurate information for all those who are interested in the welfare of the organization. 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. Which are the various methods of Costing? In accounting, cost is defined as the cash amount or … Cost is defined as “the amount of expenditure (actual or notional) incurred on or attributable to a given thing or to ascertain the cost of a given thing”. In this technique same costing practices are followed across certain units to facilitate comparison. 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