Elements and Components of Cost

In the Oxford Dictionary ‘cost‘ means ‘the price paid for something’. But in the management terminology, ‘cost’ refers to expenditure and not to price. ‘Cost’ represents a sacrifice, a foregoing or a release of something of value. The Institute of Cost and Management Accountants, London, has defined cost as “the amount of expenditure (actual or …

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Essential Factors to be Considered for Designing a Cost Accounting System

For ensuring the efficient and successful operation of the cost accounting system, certain factors are to be given due consideration while designing such a system. These factors may be given as follows: (i) Technical Details of the Business: All the technical details of the business concern, its organizational structure, manufacturing procedure and process, selling and …

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Objections to Cost Accounting

Sometimes certain objections are raised against cost accounting system and some disadvantages thereof pointed out. But the fact remains that there are no real disadvantages of the system itself. The disadvantages of the cost accounting system arise only if the system is not applied with caution and care. Main Objections to Cost Accounting The main …

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Advantages of Cost Accounting

Cost accounting system renders invaluable services to the manufacturers, management, employees, investors, consumers and Government. These services or advantages may be summarized as follows: (A) Advantages to manufacturers and management The main advantages of a sound cost accounting system to the manufacturers and management are: 1. Ascertainment of cost: The principal object of cost accounting …

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Similarities and Differences Between Cost Accounts and Financial Accounts

Similarities Cost accounts and Financial accounts which are kept quite separate in a business concern, are similar in certain respects while in some other respects these differ from each other. The various  similarities between cost accounts and financial accounts may be given as follows: (i) Both cost accounts and financial accounts are maintained on the …

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Comparison between Cost Accounting and Financial Accounting

Cost accounting is very closely related to financial accounting. It is generally said that the cost accounting system is complementary to the financial accounting system. According to L. W. Hawkins—”the ordinary trading account is a locked warehouse of most valuable information, to which the cost system is the key.” The Trading and Profit and Loss …

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Costing, Estimating and Pricing

Sometimes there may arise confusion as regards the exact meaning of the terms ‘Costing‘, ‘Estimating‘ and ‘Pricing‘, which are used in connection with cost accounts. The exact meaning of these terms should be understood at this stage. Costing meanings and definition ‘Costing’ means ascertaining the actual cost. It can be defined as ascertaining the actual …

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Selling and Distribution Overheads

Definition of Selling and Distribution Overheads According to the terminology adopted by the Institute of Cost and Management Accountants, England, the selling overheads constitute “the cost incurred in promoting sales and retaining customers“ and the distribution overheads constitute “the cost of the process which begins with making the packed product available for despatch and ends …

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Administrative Overheads

Introduction It is common practice to classify and separately collect the production, administrative, selling and distribution costs. The administrative overheads are related to office expenses. The selling and distribution expenses are related to marketing. All these expenses combined together give us the total selling cost. While accounting the production overheads and valuing the closing stock, …

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Methods of Time-Keeping

There are two methods of time-keeping: 1. Manual Methods which are divided into dance Register or Muster Roll and (ii) Check, Token or Disc Method. 2. Mechanical Methods which are divided into Time Clock Method : (a) Dial Recorder System and (b) Key Recorder System. 1. Manual Methods of Time-Keeping (a). Attendance Register or Muster …

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Difference between Direct and Indirect Labor Cost

Direct labor Direct labor refers to that labor which can conveniently been identified or attributed wholly to a particular job, product or process. It is employed directly on the production work. Direct labor is that labor which is used in converting raw material into finished goods. It helps in altering the construction, Composition or condition …

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Procedure of Stock Verification

Usually, the following procedure is followed in any Stock verification: 1. Preparing a programme of verification. 2. Getting approval from the appropriate authority. 3. Appointing the team of the verifier. In continuous stores verification, the staff is permanent and in fact, under this method, there is no appointment of the verifiers team. But in annual …

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Stock verification methods

Following are the two methods of Stock Verification: 1. Annual Stores Verification. 2. Continuous Stores Verification. Annual Stock Verification Annual Stock Verification is also known as periodical stock verification. Under this method, the whole of the stock is verified (audited) at the end of a given period which, in normal circumstances, is the close of …

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What is Stock Audit?

Stores lying in the store on a given date Known as stock. Thus stores and stock convey the same meanings in every sense of the term. Stock audit refers to physical verification of stock with the stores records maintained. Thus, the audit is nothing but verification if there is any, detection of those discrepancies, finding …

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Classification and Codification of Materials

Classification of Materials ‘Classification‘ refers to the systematic division, grouping or categorization of materials or store items with reference to some common characteristic. Classification of materials can be made on different bases namely nature, manufacturing process, value, purpose etc. For identification of materials being purchased and stored it is necessary that they should be properly …

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Inspection and Storage of Materials

Inspection of materials With the development of new products and quality improvement of old products as a result of increasing precision capabilities in measurement and manufacturing techniques, it has become necessary to thoroughly inspect the materials purchased either at the supplier’s godown or at the time goods are received by the receiving department. The main …

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Procedure for Receiving of Materials

Procedure Materials ordered are supplied to the Receiving Department which is required to unpack the goods and is also required to verify the same with the help of (a) the copy of the purchase order, (b) delivery challan received from the transport agency or the supplier, and (c) the invoice or the bill. The verification …

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Purchasing of materials

What do you mean by Purchasing of materials? Procurement of materials for a price is ‘purchasing’. It is usually handled by a separate department, if the size of the concern is large enough, under a purchase manager. A purchasing department can function effectively if: (i) It is organized on centralized basis. (ii) Full co-operation between …

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Material Control

Definition of Material Control “Materials control is the systematic control over the materials at all its stages—procurement, storage and usage—so as to help in maintaining regular and uninterrupted flow of the materials in the production pipeline.” No system of costing can be said to be complete without the proper system of material control. Material control …

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Cost Center and Cost Unit

In cost accounting, costs are ascertained by cost centers and cost units. As such, it is necessary to know the meaning of these two terms. Cost Center Definition The Institute of Cost and Management Accountants, London has defined cost center as “a location, a person or an item of equipment (or group of these) in …

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Installation of Costing System

Broadly speaking, the objective of any costing system should be to collect statistical data for significant operations of the undertaking, to analyze it and to make it available to the management in a suitable form with a view to assisting it in taking managerial decisions. Hence the costing system should primarily be set up for …

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Costing

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 …

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Cost Accountancy

Cost Accountancy has been developed to meet the needs of the management of all those organisations which It has now become an essential part of accountancy which only a few decades ago was very much a part of the financial accounting. The Institute of Cost and Management Accountants, London has defined Cost Accountancy as “the …

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Backlog Depreciation

Definition of Backlog Depreciation Whenever an asset is revalued, the profit on revaluation is transferred to Revaluation Reserve Account. But, the revaluation also gives rise to a backlog depreciation. This backlog depreciation should be charged to Revaluation Reserve Account. The concept of backlog depreciation can be followed by the help of the below illustration. Formula …

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Calculation of Depreciation Adjustment under Current Cost Accounting Technique

The Current Cost Accounting method assets are shown in the balance sheet on current replacement costs after allowing for depreciation. This will require an adjustment in depreciation too. Formula Current year’s depreciation under CCA can be calculated with the help of following formula: And, Depreciation Adjustment = Current year’s depreciation on CCA – Depreciation on …

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Merits and Demerits of Inflation Accounting

High inflation results in more profits and high financial difficulties. The dividend and income taxes are paid on increased profit calculated on the basis of historical cost concept. Therefore a change from historical cost concept to price level or inflation accounting is recommended to show the correct profit and true and fair of balance sheet. …

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Limitations of Historical Cost Accounting

Following are some limitations of historical cost accounting: (i) Failure to disclose current worth of the enterprise. The accounts presented on the basis of historical concept do not show many effects which are due to the inflation gap. Thus, the true and fair view is not shown. (ii) Uncomparable items in financial statements. Sometimes due …

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What is dividend policy?

Meanings of Dividend Dividend is the payment to shareholders in lieu of their share capital. It is that portion of profits of a Company which is distributable among its shareholders according to the resolution passed in the meeting of Directors. This may be a fix percentage on the share capital or at fixed per share. …

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Current Purchasing Power Method (C.P.P.)

Definition Current Purchasing Power Method (C.P.P.) is also known as General Price-Level Accounting. This method is recommended by the Accounting Policy Board and also the Financial Accounting Standards Board (FASB) of USA. This method adjusts historical cost for changes in the general level of prices as measured by the general price-level index. Changes in the general …

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Current Cost Accounting (CCA) Technique

What is Current Cost Accounting? – Definition The adoption of Current Cost Accounting Technique in place of Current Purchasing power of Replacement Cost Accounting Technique for price level changes. The crux of the current cost accounting technique is the preparation of financial statements (Balance Sheet and Profit and Loss Account) on the current values of …

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Inflation Accounting

Definition Inflation is that state of affair when money in circulation is more than the production of commodities and services and purchasing power of money comes down and prices of commodities and services increases. Accounting for changing prices (Inflation Accounting) has become synonymous with accounting for inflation due to the unprecedented pressure of inflationary price …

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Methods of human resource accounting

A number of different valuation models have been developed for the measurement of human assets in an organization. The various approaches may be divided into two categories: (i) Monetary measures, and (ii) non-monetary measures. Monetary Measures 1. Replacement Costs In this method, the value of an employee is estimated in terms of the cost that …

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Human Resource Accounting

Definition The term ‘Human Resource Accounting‘ means accounting for human beings, the most important-organizational resource. The accounting of it deals with the measurement of costs which are associated with recruiting, selecting, hiring, training, placing and developing the employees of an organization. It also involves measuring the present economic value of human resources to an organization. …

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Transfer pricing illustrated

Suppose, A company has two divisions: Division A and Division B. Division A sells to Division B and to other outside customers. Division B buys from only Division A. The following unit costs wrere incurred by Division A for the coming year: Direct Materials = $10 Direct labor = $6 Variable manufacturing overhead = $3 Variable …

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Transfer pricing practice and policies

Transfer price is an important factor in evaluating divisional performance measurement mainly because of the desire of the selling and buying divisions of the same company to maximize their individual performance. A great deal of intra firm buying and selling occurs in decentralized firms which necessitates the setting of transfer prices. For example, a textile …

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What is transfer pricing?

In an organization where there are a number of divisions or departments, the question of pricing of products from one division to another becomes important. For example, the price that one division should charge or be allowed to charge another for goods and services provided. Definition A Transfer-price is the internal price at which goods …

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Overhead absorption

What is Overhead Absorption? Overhead absorption is defined as the allotment of overhead to cost units. When the amount of overheads has been determined on the pre-determined basis for each cost center, the next step is to charge it to production. This involves taking each cost center and to apply its overheads to all the …

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Departmentalization of Overheads

Definition Departmentalization of overheads refers to the process of determining overhead costs of each department involved in the production. Explanation For the purpose of departmentalization, departments of a factory are divided into two categories i.e., production departments and service departments. Departmentalization of overheads is done in two stages. (a) Allocation of Overheads (b) Apportionment of Overhead …

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Apportionment of overhead expenses

Definition and meanings of apportionment of Overheads There are certain overhead expenses which cannot be charged totally to a specific department or shop, Such expenses are apportioned in a suitable ratio over related departments or shops. Apportionment means distributing of overhead items to cost centers on a fair and reasonable basis. Thus the principle is …

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Cost Accounting Cycle

Cost Accounting Cycle embraces activities connected with verification and preparation of source documents, their journalizing, then posting to control accounts and subsidiary ledgers, closing of accounts and presenting results of operations of accounting period in the form of the income statement. Period Covered By Cost Accounting Cycle Accounting period means the time period covered by an …

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Costing methods and techniques

Costing is the technique and process of ascertaining costs. Keeping this definition in view various methods have been evolved to ascertain the costs. A few of the important methods of ascertaining the costs are as enumerated below: 1. Job Costing 2. Contract Costing 3. Cost plus Costing 4. Batch Costing 5. Process Costing 6. Single …

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Economic order quantity (EOQ)

Definition and Meanings Economic order quantity (EOQ) is the order quantity of inventory that minimizes the total cost of inventory management. EOQ refers to the size of the order which gives the maximum economy in purchasing any material. It is the optimum of standard ordering quantity. Explanation This concept relates to the quantity of materials …

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What is cost accounting?

Definition of Cost Accounting Cost accounting is the collection, processing and evaluation of operating data e.g., cost of products, operations, processes, jobs, quantities of materials consumed, labor time used etc. for internal planning and control as well as for external reporting. How does cost accounting help In better control over cost? Cost accounting helps in attaining …

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