Costing

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Definition

The Institute of Cost and Management Accountants (ICMA) defines costing as “the techniques and process of ascertaining costs“.

This simply speaks of technique and process. To elaborate it can be said that costing is a systematic process of determining the unit cost of output produced or service rendered, It analyses the expenditure incurred on manufacturing an item or for rendering a service.

This enables the management to know not only the total cost but also its constituents. Thus costing, as a technique, is the body of principles and rules for ascertaining the cost, And as a process, it is the procedure for ascertaining the costs. Both the technique as well as the process to be used depending upon the nature of industry and type of product and method of production.

Objectives of Costing


The objects of costing can broadly be divided into the following three heads:

1. Ascertainment of Cost

It is the first but most important objective of costing. It is to ascertain the cost of each product, process or operation and to ensure that all the expenses have been absorbed in the cost of products, the techniques and process of costing as used.

To ascertain the cost management, with the help of cost department, make certain preliminary investigations and introduces a system of recording the costs. A proper and complete record is maintained for materials, labour and other expenses (referred to as covered heads). Thus the management comes to collect cost data which forms the basis of the determination of selling price. The costs and sales are matched. This matching process helps in ascertaining the profitability of the product.

Thus the costing does not only ascertain the cost but it also provides a basis for ascertaining the profitability of the product being produced or services being rendered.

2. Cost Control

Only ascertainment of cost will not do. Naturally, it will not because it is the cost which ascertains the
selling price and in turn the profitability. “The less is the cost the more is the profitability is a norm which everyone tries to follow. For fulfilling the underlying idea behind this norm it is necessary to control the cost so as to reduce the cost of a product or service.

Budgets are prepared, Standards are set up. Actuals are ascertained. Then a comparison is made. In case any deviation is found between the actuals and the budget and the standards, remedial measures are taken. This helps in controlling the cost and enabling the management to either earn more or reduce the selling price and thus allowing the customer to gain or improve the quality and this may build goodwill for the product as well as for the firm.

3. Guidelines for Management

‘Costing’ was given a thought only to serve the needs of management, In fact it has developed primarily to serve the management in its decision-making process. Management in this way helps in achieving the utmost efficiency for the whole organisation, Costing provides cost data. Cost data provides organisation guidelines for various managerial decisions, e.g., introduction of new product line, make or buy decision, utilisation of capacity not being utilised, expansion, etc. Costing is a most faithful servant of the management from all practical point of view And that too for better results.

Advantages of Costing

Costing as we have seen above provides valuable cost data and is, thus, helpful in taking various managerial decisions. For rendering a faithful and effective service it is necessary to have a sound system
of costing. The nature and extent of the advantages of costing which may accrue to management largely depends on the:

(i) type,
(ii) adequacy
(iii) efficiency
(iv) objectives of the costing department
(v) the co-operation which the costing department is able to receive from various departments of the organisation.

Taking this in view we can safely say that it is not the costing but how it functions and how much it delivers is important from this viewpoint. A sound system of costing helps in deriving the following advantages:

  • Costing provides cost-data for managerial decisions.
  • Costing provides information which may help in making estimates and then in calling for tenders etc.
  • Costing reveals losses a particular unit is incurring.
  • Costing reveals the inefficiencies at various levels.
  • Costing helps in knowing the exact cause of a decrease or increase in the profit or loss of a business as a whole or unit wise as may be required.
  • Costing reveals profitable or unprofitable units, ventures, etc.
  • Costing guides future policies.
  • Costing provides an independent but reliable check on the financial accounting as it helps in the reconciliation of the two activities.
  • Costing controls the cost.
  • Costing compares the costs of different methods, machines, system, etc. and helps in decision-making in this regard.
  • Costing provides a tool for price fixation as well as a price control.
  • Costing helps the Government in taking a decision on tariff protection and information about wage policy.
  • Costing helps the management in wage fixation.
  • Costing provides a solid base for efficient and smooth functioning of the enterprise as a whole.

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