Ideal Costing System.

 Q13. What are the essentials of an ideal costing system?
Ans. Following factors are essentials:

  1. It should be simple, tailor-made, practical and as per requirement of concern.
  2.  Accurate data should be used.
  3.  Necessary Corporation and participation from various departments.
  4.  Economical system in terms of its cost.
  5. Proper planning and programming in introducing of system.
  6. Faith of Management on the system.

Installing and Designing a Cost Accounting System.

Q11. What are the factors to be considered while installing and designing a cost accounting system?
Ans. Following factors is to be considered:

  1. Objectives of cost system should be pre-determined.
  2. Area of operation should be fixed.
  3.  Organization and management should be signed out.
  4. Technical aspects should be studied.
  5. Nature of variable expenses and changes in it with the changes in the volume of output should be studied.
  6.  Manner and nature of integration between cost and financial accounts.
  7. Type of information available, its nature, source, and other details should be considered.
  8. Method of verification of accuracy of data should be considered.

Methods of Costing.

Q10. What are the methods of Costing?
Ans. Methods of Costing are:

  1.  Job Costing: According to this method, costs is collected and accumulated according to jobs or contract. Each job is treated as a separate entity for the purpose of costing. Its purpose is the ascertaining the cost of each job separately. For example: Printing Press.
  2. Batch Costing: It is a form of job costing. In such costing, a lot of similar units which comprises the batch may be used as a cost unit for ascertaining cost. The number is allotted to each such batch.
  3. Contract Costing: It is a form of application of the principles of job costing. In fact bigger job is treated as contract. Contract costing is usually adopted by building contractors.
  4.  Single or Output Costing: Where only one product is produce, until or output costing is applied. In such method, a cost sheet is prepared for such items showing total cost and also cost per unit.
  5. Process Costing: Where goods  pass from one process or operation to another process or operation then separate account is prepared for each such process or operation. Such system of Costing is called process costing. It is used in the industries like steel, soap, chemical etc.
  6.  Operating Costing: Undertakings, which provide service, uses such method of Costing. For example transport, passenger buses etc. In such undertaking, cost unit are expressed in terms of ton per kilometer, passenger per kilometer etc.
  7.  Multiple Costing: When an undertaking use two or more methods at one time than it is using multiple costing. It is used by those undertaking which produce two or more goods.

Techniques or Types of Costing.

Q9. What are Techniques or Types of Costing?
Ans. Various techniques of Costing are as follows:

  1. Uniform Costing: When a number firms in an industry agree among themselves to follow the same system of Costing in detail, adopting common Technology for various items and processes, they are said to follow of uniform costing.
  2. Marginal Costing: Marginal costing means the amount at any given volume of output by which aggregate cost are changed if the volume of output is increased by one unit. The ascertainment of marginal cost and of the effect on profit of change in the volume or type of output by differentiating between fixed and variable cost.
  3. Standard Costing: It is a cost ascertainment and cost control technique. In such costing, cost is predetermined and then actual results are compared with predetermined result to measures variance to take corrective action.
  4. Historical Costing: In such costing, cost is recorded after it is incurred. Show in such technique, only actual cost is recorded. It has limited use in costing.
  5. Direct Costing: When all direct expenses are charged only leaving all indirect cost, such method is called direct costing.
  6. Absorption Costing: When all cost is charged to production and total cost is absorbed on cost unit, it is called absorption costing.

Cost Unit.

Q8. What do you mean by cost unit?
Ans. It is a unit of product, service, or time (or combination of these) in relation to which cost maybe a ascertained or expressed. Cost unit are usually the units of physical measurements like number, weight, length, Time and value. For example, number in automobile industry, ton in cement industry, liter in chemical factory etc. The unit selected must be one with which expenditure can be most readily associated and is generally a unit clearly appropriate to the business.

Cost Center.

Q7. What do you understand by the term cost center?
Ans. It is defined as location, person or an item of equipment(or group of these ) for which cost maybe ascertained and used for the purpose of cost control. A Cost center maybe a particular workbench or machine or group of machine of one type or an activity or a location. It is classified into four center:

  1. Personal Cost Center: Cost center, which consists of a person or group of persons called personal cost center.
  2. Impersonal Cost Center: It consists of a location or an item of equipment( or group of these).
  3.  Production Cost Center: Cost Center which produce goods called production cost center. For example machine shop, welding shop etc.
  4.  Service Cost Center: It is a cost center which serves as an ancillary unit to a production cost center.

Reports Provided By Cost Accounting Department.

Q6. What are the various reports generally generated by the cost accounting department?
Ans. Reports provided by cost accounting department are as follows:

  1.  Cost sheet.
  2.  Consumption of material statement.
  3.  Labor utilization statement.
  4.  Statement following overhead incurred compared with budget.
  5.  Statement showing sales compared with budget.
  6. Reconciliation statement between financial profits with costing profit.
  7. Statement showing abnormal losses.
  8. List of closing inventory and monthly consumption sheet.
  9. Labor turnover and its related cost.

Importance of Cost Accounting.

Q5. What is the importance of cost accounting?
Ans. Importance of cost accounting are as follows:

  1.  Identifying unprofitable activities, and inefficiency and losses.
  2.  Cost control though cost control and cost reduction technique.
  3.  Locate exact causes for decrease or increase in profit/ loss.
  4.  Provide information to top management for decision making.
  5. It is helps in price fixation.
  6. It variance analysis helps in dictate out the deviation of actual result for estimated figures.
  7. Costing provides information to government, wages tribunal and other bodies for various uses.
  8. It works out the cost of idle capacity so suitable action can be taken.
  9. It establishes more accurate cost per unit and cost structure.
  10. Help in preparation of more frequent and more accurate financial accounts.

Objectives of Cost Accounting.

Q4. What are the main objectives of cost accounting?
Ans. Objectives of cost accounting are as follows:

  1. Ascertainment of cost by post costing and continuous costing methods.
  2. Determination of selling price of each product by considering its cost and profit margin.
  3.  Cost Control and cost reduction.
  4.  Ascertaining the profit of each activity so suitability of each activity in business can be determined.
  5. Assisting management in decision making both short term and long term decision through its technique like marginal costing.
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