Costing Flashcards
(41 cards)
What is cost
Cost is what’s incurred to produce a product or provide a service. total sum of all expenses to manufacture a product or deliver a service.
Examples: Ice Cream: Cost includes milk, cream, sugar, labor, packaging, etc.
Icma London: Cost is the amount of expenditure (actual or notional) incurred on, or attributable to, a specified thing or activity.
Cost vs. Price:
- Cost: Total expenses (may include profit margin in some contexts).
- Price: Total expenses plus profit.
Costing?
techniques and processes used to determine the cost of a product. It’s about figuring out how much it costs to make something.
Example: Process Costing is used in dairy industries (ice cream, paneer, ghee, curd) to track costs through different production stages.
ICMA, London : Costing is the “ascertainment of costs.” This involves techniques and processes which follow principles and rules to find the cost of manufactured products and services rendered.
Purpose of costing?
1.Ascertain Exact Cost: To find the precise cost of a product.
2. Determine Operation : To know the cost incurred at each stage of production.
3. Decide Selling Price: To help set the price of a product.
4. Prevent Excessive Loss: To identify and control waste during manufacturing.
5. Suggest Better Design: To enable cost reduction through improved product and process design.
Choice of costing method depends on?
(i) Nature of Industry: The type of business (e.g., manufacturing, service).
(ii) Class of Products Manufactured: The kind of goods produced (e.g., standardized, unique).
(iii) Quantity of Goods Produced: The volume of output.
(iv) Types of Labour Required: The skills and nature of the workforce.
Meaning and Definition of Cost Accounting
- Proces of Recording, analyzing, and reporting the costs of a product.
- Formal System that Uses cost records to ensure cost ascertainment is easy and reliable.
- Cost Determination: Identifies both fixed and variable cost elements associated with a product.
- Techniques of Cost Accounting:
- Uniform Costing
- Absorption Costing
- Historical Costing
- Batch Costing
- Unit Costing
Icma London : specialized application of the general principles of accounting in order to ascertain the cost of producing and marketing any unit of manufacture or of carrying out any particular job or contract.”
Objectives of cost accounting
- Determine Cost of Production
To calculate the total cost involved in producing a product or providing a service accurately. - Cost Control
To monitor and reduce unnecessary expenses by comparing actual costs with standard costs. - Cost Reduction
To find long-term methods to lower costs without affecting quality or efficiency. - Fixing Selling Price
To help set a competitive and profitable selling price based on cost data. - Profitability Analysis
To identify the profit earned from different products, services, departments, or operations. - Budgeting and Forecasting
To assist in planning future financial activities by estimating costs and setting budgets.
Advantages
Cost Control and Reduction
Helps identify and reduce unnecessary expenses by providing detailed cost information.
- Helps in Pricing Decisions
Assists in setting competitive and profitable prices by accurately calculating production or service costs. - Improves Profitability
Helps identify profitable and underperforming areas, improving overall business profitability. - Informed Decision-Making
Aids managers in making decisions about investments, cost-cutting, and product strategies using accurate cost data. - Budgeting and Planning
Assists in preparing budgets and forecasting future costs, leading to better financial planning. - Inventory Valuation
Ensures accurate financial statements by calculating the correct value of inventory. - Performance Evaluation
Compares actual costs to standard or budgeted ones, helping assess departmental or product performance. - Helps in Expansion Decisions
Supports evaluating if expanding into new markets /launching new products is financially viable.
Limitations
Complexity
Involves detailed tracking and reporting, which can be time-consuming and require expertise.
- High Costs of Implementation
Expensive to set up and maintain, especially for small businesses (requires systems, tools, and experts). - Not Useful for Non-Manufacturing Businesses
Designed mainly for manufacturing; less effective for service industries. - Dependence on Accurate Data
Inaccurate data can lead to wrong cost analysis and poor decision-making. - Does Not Reflect External Factors
Focuses only on internal costs, ignoring market trends, competition, and economic changes. - Short-Term Focus
Emphasizes cost-cutting over long-term goals and investments that may bring future profits. - Focus on Quantifiable Data
Ignores qualitative aspects like employee morale, customer satisfaction, and brand reputation.
Cas
CAS is a crucial part of financial management focused on determining the cost of goods or services produced.
Benefits: Provides businesses with essential data for budgeting, pricing, controlling costs, and assessing profitability. CAS brings uniformity and standardization.
Significance of cas
- Consistency Across Industries: CAS ensures that businesses follow a uniform approach in costing, making it easier to compare costs across different organizations or industries. This is particularly important in public sector undertakings, government contracts, and regulatory frameworks.
- Transparency in Financial Reporting: By adopting CAS, businesses maintain transparency in reporting costs. It helps external stakeholders (shareholders, regulatory authorities, etc.) to understand, assess a company’s cost structure and its financial health.
- Cost Control: CAS guide organizations on how to break down and allocate costs effectively, helping in identifying areas for cost reduction and better cost control.
- Regulatory Compliance: Cas are mandatory for businesses engaged in certain activities, like government contracts. Adhering to these standards ensures compliance with regulatory requirements and facilitates audit processes.
Cost Unit:
The total expenditure incurred to produce, store, and sell one unit of a product or service. It’s the base unit for cost measurement and analysis.
Includes both variable cost and fixed cost per unit.
Selection Factors: Various factors must be considered when choosing an appropriate cost unit
Examples:
Milk: Quantified as per litres, per gallon.
Power and Electricity: Measured as kilowatt-hours
Single Cost Unit and Composite or Complex Unit
Involves using a single, standard unit of measurement for the goods manufactured. It’s a straightforward way to quantify output and costs.
Examples:
Product per piece (e.g., number of pens)
Per kilogram (e.g., weight of sugar)
Per quintal (100 kg)
Per tonne (1000 kg)
Per gallon (liquid volume)
Per meter (length of fabric)
A combination of two or more simple units to measure output, especially when the nature of product or service involves multiple dimensions. This provides a more comprehensive measure.
Examples:
Per passenger-kilometer
Per tonne-kilometer
Per kilowatt-hour
Cost centre
A division within a company where the manager and employees are responsible for its costs but not directly for sales or profit. It’s a unit focused on cost management.
EStimate
Approximate calculation of cost, qty, time, resources needed for a project. Usually prepared by a contractor/ engineer b4 starting the work.
Tender and quotation
A formal offer made by a company or supplier to undertake a job or supply goods at a specified time under certain terms and conditions. Generally invited by organisations via public or private bidding processes.
Used in large business projects.
Quotation is a formal document or statement provided by a seller to a potential buyer, stating the price and terms for specific goods or services. It is usually prepared before a transaction occurs.
Significance
Estimate:
1.help in budget planning and dcsn making
2.provides basis for comparing actual cost
3.guides project scope and resource allocation
Tender
1. Encourages competitive pricing.
2.ensure transparency & fairness in procurement
3. Helps select best contractor/ vendor based on both price and capability.
Quotation
1.facilitate quicker purchasing dcsn
2.offers flexibility in procurement
3.useful for smaller/ repetitive orders.
Material accounting
Involves tracking managing the movement , usage and storage of the material within an organization. Ensures proper inventory control and help in cost management.
Store location
specific space or area in an organization where material, goods or inventory are stored for future use, distribution. It’s selected based on factors like accessibility, safety,space availability to ensure efficient material handling and control.
Store layout
Physical arrangement and organization of storage areas, equipment within a store / warehouse to facilitate storage , movement and retrieval of materials.
A well planned store layout helps in maximizing space utilisation, smooth workflow and inventory control.
Bin card
1.A record kept at the storage location to track qty of materials recieved, issued , & balance remaining.
2.Typically maintained by storekeeper.
3.Provides real-time info on stock lvls.
4.Helps in controlling physical stock ensuring there’s no overstocking.
5.Useful during physical stock verification or audits .
6.It’s updated with each material transaction.
7.It only tracks qty of materials, not their monetary value.
Store ledger
Formal record maintained by store/ inventory department.
It tracks both qty and value of materials.
It includes detailed entries of recieved,issued and balance based on supporting doc’s like goods recieved notes and issue vouchers.
Essential for inventory valuation, cost control and financial reporting.
Plays crucial role in audits, financial analysis and ensuring proper stock valuation within orgn.
First In First Out (FIFO)
method where the materials that are received first are issued or used first.
* In other words, the earliest inventory purchases or materials are the first ones to be issued for use in production or sales.
Last In First Out (LIFO)
- A method where the most recent materials purchased are the first ones to be issued.
- Under LIFO, the latest inventory items purchased are the first to be used up in production or sales, regardless of when they were purchased.
