Definition
Cost may be defined as the amount of cash equivalent
or the fair value of other consideration given to acquire an asset at the time
of its acquisition or construction.
To the economists, cost is what must be given up in
order to obtain something. Accountants, extending the perspective of economist,
view cost as the value of economic resources used in the production of goods,
services, income or profit. Accounting is a term desired from account and which
is simply defined as an expression of transaction.
American Accounting Association (AAA) defines
Accounting as the process of identifying, measuring and communicating
economic information to permit informed judgment and decisions by users of the
information.
Financial accounting can be defined as the classification
and recording of the monetary transactions of an entity with established
concepts, principle accounting standards and legal requirements, balance sheets
and cash flow statements during and at the end of an accounting period.
Cost Accounting (traditionally termed costing) may
be defined as gathering of cost information and its attachment to cost objects,
the establishment of budgets, standard costs and actual costs of operations,
process, activities or products; and the analysis of variances profitability or
the social use of funds.
Scope
The foundation of the internal financial information
system of any organization is the cost accounting. In-fact management needs a
variety of information to plan, to control and to make decisions. The cost
accounting system provides information regarding the financial aspects of
performance of any organization examples of the information provided by a
typical cost accounting system and how it is used are given in the following
table.
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Information Provided by cost Accounting System
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Possible Uses by Management
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- Cost
per unit of production or service or for a process.
- Cost of
running a section, department or factory.
- Wage
costs for a unit of production or per period of production.
- Scrap/rectification
costs.
- Cost
behavior with varying levels of
activity.
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- As a
factor in pricing decisions, production planning and cost control.
- Organizational
planning cost control.
- Production
planning decision alternative methods.
- Material
cost control production planning.
- Profit
planning, make or buy decision, cost control.
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Activity organizes students in group and directs
them to identify different products and services to which cost accounting
information can be applied.
Purpose
Specific purpose of establishing cost accounting
will include:
a. The
ascertainment of the cost of goods produced or services provided.
ii. The
information of the cost of a department or work section.
iii. The
profitability or otherwise of a product, a service, a department or the entire
organization.
iv. The actual
selling price with some regards for the cost of sales expenses incurred in
bringing the goods to suitable condition.
v. The
ascertainments of what revenue have been realized for a particular period.
vi. To ascertain
the future cost of goods and services by way of budgeting standard and
estimates.
Methods
A cost accounting method (costing method) is a
system which is designed to suit the way goods are processed or manufactured or
the way that services are provided. Or better still it could simply be referred
to as a system of cost finding and ascertainment. They are designed to suit the
way goods are processed or manufactured or the way services are provided. It
follows therefore that each firm will have a cost accounting method which has
unique features. Nevertheless there will be recognizable common features of the
cost accounting systems of firms who are broadly in the same line of business.
Conversely firms employing substantially different manufacturing methods as
will the huge variety of service organizations. It must be clearly understood
that whatever cost accounting method is employed, the basic costing principles
relating to analysis, allocation and apportionment will be used.
Each organization costing method will therefore have
unique features but costing method of firms in the same line of operation will
likely have common aspects. For example:
- Where
work is undertaken to customers. Specific requirements, the method of costing
that will be appropriate is job costing.
- Where
standardized goods result from a sequence of respective and more or less
continuous operation or process, then process costing is appropriate.
However, organizations involved in completely
different activities such as hospitals or hotels and car part manufacturers,
will use different methods.
There are two broad categories of product costing
methods namely specific order costing and continuous operational/process
costing.
- Specific
order costing can be defined as a basic costing method applicable where work
consists of separately identifiable contacts jobs or batches. In most cases,
the job or contacts are different from each other. The main subdivisions of
specific order costing are:
i. Job
costing
ii. Contact
costing
iii. Batch
costing
- Continuous
operation/process costing (sometimes called unit costing). This can be defined
as a costing method applicable where goods and services result from a sequence
or continuous or repetitive operations or processes. Costs are averaged over
the units produced during the period, being initially charged to the operation
or process.
The key feature of this definition is that operation
(or unit) costing seeks to establish the average cost per unit during a period
for a number of identical cost units. The main sub-divisions of operation
costing are:
i. Process
costing including Joint and By-product costing.
ii. Service/function
costing: This type of costing although not relating to production cost units
similar principles, whereby an average cost is established per unit of service.
For example, an averages cost per meal supplied could be calculated for the
canteen which is a service cost centre.
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