Its goal is to cost and management audit pdf the management on the most appropriate course of action based on the cost efficiency and capability. Cost accounting provides the detailed cost information that management needs to control current operations and plan for the future.
Since managers are making decisions only for their own organization, there is no need for the information to be comparable to similar information from other organizations. Instead, information must be relevant for a particular environment. All types of businesses, whether service, manufacturing or trading, require cost accounting to track their activities. Money was spent on labor, raw materials, power to run a factory, etc. Managers could simply total the variable costs for a product and use this as a rough guide for decision-making processes. Some costs tend to remain the same even during busy periods, unlike variable costs, which rise and fall with volume of work.
Examples of fixed costs include the depreciation of plant and equipment, and the cost of departments such as maintenance, tooling, production control, purchasing, quality control, storage and handling, plant supervision and engineering. In the early nineteenth century, these costs were of little importance to most businesses. However, with the growth of railroads, steel and large scale manufacturing, by the late nineteenth century these costs were often more important than the variable cost of a product, and allocating them to a broad range of products led to bad decision making. Managers must understand fixed costs in order to make decisions about products and pricing. For example: A company produced railway coaches and had only one product. 300, managers knew they couldn’t sell below that price without losing money on each coach. 300 became a contribution to the fixed costs of the company.
Financial accounting aims at finding out results of accounting year in the form of Profit and Loss Account and Balance Sheet. Financial accounting reports the results and position of business to government, creditors, investors, and external parties. Cost Accounting is an internal reporting system for an organization’s own management for decision making. In financial accounting, cost classification is based on type of transactions, e. In cost accounting, classification is basically on the basis of functions, activities, products, process and on internal planning and control and information needs of the organization. Classification of cost means, the grouping of costs according to their common characteristics. Direct costs are assigned to Cost Object.
Indirect costs are allocated or apportioned to cost objects. By Behavior: fixed, variable, semi-variable. Costs are classified according to their behavior in relation to change in relation to production volume within given period of time. Fixed Costs remain fixed irrespective of changes in the production volume in given period of time. Variable costs change according to volume of production. Semi-variable costs are partly fixed and partly variable. By control ability: controllable, uncontrollable costs.
Controllable costs are those which can be controlled or influenced by a conscious management action. Uncontrollable costs cannot be controlled or influenced by a conscious management action. By normality: normal costs and abnormal costs. Normal costs arise during routine day-to-day business operations. Abnormal costs arise because of any abnormal activity or event not part of routine business operations. Historical costs are costs incurred in the past. Predetermined costs are computed in advance on basis of factors affecting cost elements.
By Decision making Costs: These costs are used for managerial decision making. Marginal cost is the change in the aggregate costs due to change in the volume of output by one unit. Differential costs: This cost is the difference in total cost that will arise from the selection of one alternative to the other. Opportunity costs: It is the value of benefit sacrificed in favor of an alternative course of action. Relevant cost: The relevant cost is a cost which is relevant in various decisions of management.
Replacement cost: This cost is the cost at which existing items of material or fixed assets can be replaced. Thus this is the cost of replacing existing assets at present or at a future date. Shutdown cost:These costs are the costs which are incurred if the operations are shut down and they will disappear if the operations are continued. Capacity cost: These costs are normally fixed costs. The cost incurred by a company for providing production, administration and selling and distribution capabilities in order to perform various functions. In modern cost account of recording historical costs was taken further, by allocating the company’s fixed costs over a given period of time to the items produced during that period, and recording the result as the total cost of production. It also essentially enabled managers to ignore the fixed costs, and look at the results of each period in relation to the “standard cost” for any given product.
This method tended to slightly distort the resulting unit cost, but in mass-production industries that made one product line, and where the fixed costs were relatively low, the distortion was very minor. As business became more complex and began producing a greater variety of products, the use of cost accounting to make decisions to maximize profitability came into question. 1980s, and began to understand that “every production process has a limiting factor” somewhere in the chain of production. In this case, activities are those regular actions performed inside a company.
Talking with customer regarding invoice questions” is an example of an activity inside most companies. Companies may be moved to adopt ABC by a need to improve costing accuracy, that is, understand better the true costs and profitability of individual products, services, or initiatives. ABC gets closer to true costs in these areas by turning many costs that standard cost accounting views as indirect costs essentially into direct costs. By contrast, standard cost accounting typically determines so-called indirect and overhead costs simply as a percentage of certain direct costs, which may or may not reflect actual resource usage for individual items. The accountant then can determine the total cost spent on each activity by summing up the percentage of each worker’s salary spent on that activity. A company can use the resulting activity cost data to determine where to focus their operational improvements.
For example, a job-based manufacturer may find that a high percentage of its workers are spending their time trying to figure out a hastily written customer order. Activity based costing, the accountants now have a currency amount pegged to the activity of “Researching Customer Work Order Specifications”. Senior management can now decide how much focus or money to budget for resolving this process deficiency. Activity based costing may be able to pinpoint the cost of each activity and resources into the ultimate product, the process could be tedious, costly and subject to errors. As it is a tool for a more accurate way of allocating fixed costs into product, these fixed costs do not vary according to each month’s production volume.