CBSE Class 12 Accounting for Business Cost Sheet

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ACCOUNTING FOR BUSINESS II

CHAPTER 1

COST SHEET

Meaning And Scope of Cost Accountancy

The term cost accountancy is wider than the term cost accounting. According to the Terminology of Management and Financial Accountancy Published by the Chartered Institute of Management Accountants, London, cost accountancy means, “the application of costing and cost accounting principles, methods and techniques to the science, art and practice of cost control. It includes the presentation of information derived there from for the purpose of managerial decision making.

Cost Accounting

Cost accounting is the process of accounting for costs. It embraces the accounting procedures relating to recording of all income and expenditure and the preparation of periodical statements and reports with the object of ascertaining and controlling costs. It is thus the formal mechanism by means of which costs of products or services are ascertained and controlled.

Costing

Costing is “the technique and process of ascertaining costs.” Cost accounting is different from costing in the sense that the former provides only the basis and information for ascertainment of cost. Once the information is made available the costing can be carried out arithmetically by means of memorandum statements or by method of integral accounting.

However, the two terms costing and cost accounting are often used interchangeably. No such distinction has also been observed for the purpose of this book. Wheldon has given an exhaustive definition of costing after expanding the ideas contained in the definitions of the terms ‘costing and cost accounting’. According to him costing is, “the classifying recording and appropriate allocation of expenditure for the determination of the costs of products or services; the relation of these costs to sales values; and the ascertainment of profitability”.

Cost Control

According to the Institute of Cost and Works Accountants of India, cost control means “The act of power of controlling or regulating or dominating or commanding costs through the application of management tools and techniques to the performance of any operation to most predetermined objectives of quality, quantity, value and time oat an optimum outlay”.

Objectives of Cost Accounting

The main objectives of cost accounting can be summarized as follows:-

1. Ascertaining Costs: - The first and foremost objective of cost accounting is to find out cost of a product, process or service. The other objectives which have been mentioned hereafter scan be achieved only when the costs have been ascertained.

2. Determining Selling Price: - Business enterprises are run on a profit – making basis. It is thus necessary that the revenue should be greater than the costs incurred in producing goods and services from which the revenue is to be derived. Cost accounting provides information regarding the cost to make and sell such products or services.

3. Measuring and Increasing Efficiency: - Cost accounting involvers a study of the various operations used in manufacturing a product or providing a services. The study facilitates measuring of the efficiency of the organisation as a whole as well as of the departments besides devising means of increasing the efficiency.

4. Cost Control and Cost Reduction: - Cost accounting assists in cost control it uses techniques such as budgetary control, standard costing etc. for controlling costs. Budgets are prepared will in advance. The standards for each item of cost are determined, the actual costs are compared with the standard costs and variances are found out as to their causes. This greatly increases the operating efficiency of the enterprise. Besides it, cost is required to be reduced also constant research and development activities help in reduction of costs without compromising with the quality of goods or services.

5. Cost Management: - The term ‘Cost Management’ includes the activities of managers in short-run and long-run planning and control of costs. Cost management has a broad focus. It includes both cost control and lost reduction. As a matter of fact cost management is often invariably linked with revenue and profit planning. For instance, to enhance revenue and profits, the management often deliberately incurs additional costs for advertising and product modifications.

6. Ascertaining Profits: - Cost accounting also aims at ascertaining the profits of each and every activity. It produces statements at such intervals as the management may require. The financial statements prepared under financial accounting, generally once a year or half – year, are spaced too far apart in time to meet the needs of the management. In order to operate the business at a high level of efficiency, it is essential for the management to have a frequent review of production, sales and operating results. Cost accounting provides daily, weekly or monthly volumes of units produced, accumulated costs together with appropriate analysis so that quantum of profit and profitability is known.

7. Providing Basis for Managerial Decision – Making: - Costs accounting helps the management in formulation operative policies. These policies may relate to any of the following matters:-

   (i) Determination of cost – volume – profit relationship.

   (ii) Shutting down or operating at a loss.

   (iii) Making or buying from outside supplies.

   (iv) Continuing with the existing plant and machinery or replacing them by improved and economical means.

 

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