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written by | July 5, 2022

Costing: Definition, Objectives, and Advantages

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Table of Content


The costing definition tends to be a quantitative strategy that interprets, accumulates, classifies, and summarises data for three crucial purposes.

  • Operational control and planning
  • Special ruling and 
  • Commodity decision.

The costing meaning is the technique of analysis of expenses from the juncture where the expense is incurred or perpetrated to the institution of its absolute relationship with expenditure units. In the broadest sense, it adopts the trial of statistical information, the cost control application strategies and the profitability ascertainment of the actives planned or carried out is interpreted as the requisition of computation and costing precepts, methods and strategies in the cost ascertainment and the estimation of saving or surplus as correlated with previous knowledge or with criteria.

It is characterised as the costing application and techniques, methods, and principles of cost accounting to the practice, science, and art of cost restraint and profitability ascertainment. It incorporates the demonstration of data emanated accordingly to the goals of the managerial ruling.

Did you know?

It is widely believed that Luca Pacioli is the father of accounting. Luca Pacioli wrote the first double-entry accounting book in 1494.

Cost Accounting Scope

The Cost accounting scope comprises these benefits. Let us dive deeper into these benefits to understand them better.  

  • Cost Accounting
  • Costing
  • Cost Analysis
  • Cost control
  • Cost Comparisons
  • Cost Reports and
  • Statutory Compliance

Costing

It is the strategy of establishing the costs of services and products. The ascertainment procedure of costs is regulated by a few cost accounting rules and principles. Commonly, costing meaning is demonstrated by employing operation costs, historical costs, process costs and standard costs.

Also Read: The Complete Guide to Cost and Management Accounting

Cost Accounting

It is a strategy of establishing costs which begins with the documentation of expenses and stops with the trial of sporadic reports and statements for controlling and ascertaining cost. It is a convenient means of ascertaining costs.

Cost Analysis

What is costing? Well, this implicates the technique of discovering the factors accountable for contention in tangible expenses from the costs that are budgeted and accordingly preoccupation of obligation for cost discrepancies. This also assists in putting up with better cost surveillance and strategic conclusions.

Cost Comparison

Costing includes a comparison of costs implicated in alternative methods of action like the use of varied technology for creation, cost of producing different activities and products, and expense of the same service or product over a time period.

Also Read: Know All About Cost Accounting

Cost Control

This involves a comprehensive examination of all costs, considering the advantage obtained from the cost occurrence. Thus, we may state that expenditure is assessed to understand whether the expense is not overstepping its budgeted expense and whether more cost deduction is feasible.

Cost Reports

It is the absolute cost accounting function. These summaries are mainly prepared for practice by the surveillance at different phases. Cost Reports benefit in control and planning, performance assessment and managerial ruling.

Statutory Compliance

Retaining costing documents according to the ordinances stipulated by the regulation to retain cost records pertaining to usage of materials, manpower and other commodities of expenditure as related to the generation of service provision or goods as furnished in the rules of the Act.

Also Read: 3 Golden Rules of Accounting Explained with Best Examples

Cost Accounting Objectives

What are the main objectives of costing?

The primary purposes of Cost Accounting are given below:

  • Cost Ascertainment
  • Selling Price determination
  • Cost reduction and cost control
  • Ascertaining the revenue of each activent
  • Assisting surveillance in rulings and
  • Approximating cost with dividend

Trial of monetary statements P&L Balance Sheet and Account

To formulate the statements and the significance of capital work in advancement, finished goods and all essentials. In the dearth of the department of cost, when we need to shut the bank accounts, it may take a lot of time.

A decent costing system promotes the practice of statements to be the figures that are easily accessible; they may be ready monthly or weekly.

Also Read: Learn About Accounting Principles and Concepts

Cost Ascertainment

The objectives of costing include cost ascertainment. It facilitates the administration to demonstrate the product, production unit, job, contract, and service cost in order to improve cost precepts.

The cost might be demonstrated under different situations employing many kinds of costing tenets – uniform costing, standard costing, and marginal costing.

Selling Price Determination

Cost data is beneficial in determining quotations or selling prices. The product price includes the total margin and cost compelled.

Cost accounts procure detailed data regarding cumulative expenses in the shape of various elements. They also deliver data for variable cost and fixed cost so that the magnitude of price deduction to be accomplished in case of intense pursuit may be determined.

Cost Reduction and Cost Control

The fundamental objective of costing is to curb cost. The aim is to undervalue the manufacturing cost comparison of substantial cost with routine demonstrates the disparity in contentions.

If the contentions are unfavourable, the management infiltrates into inquiry in order to adopt remedial action instantly.

Ascertaining the Revenue of Each Movement

The revenue of any recreation can be demonstrated by approximating expenditure with the dividend of that action. The objective under this phase is to specify costing loss or profit of any recreation on a factual rationale.

Assisting Surveillance in Decisions

Decision-making implies a method of assigning a program of action from alternative methods. For rendering a selection between different methods of activity.

It is essential to generate an outcome comparison which might be completed under different options. Such comparisons have only been rendered feasible with the support of data from cost accounting.

Also Read: Profit and Loss Account & Statement

Approximating Cost with Dividend

The judgment of each product, process, and department possibility is the significant goal of costing. This involves a lot of specifications like budgeting, price determination, costs involved, overheads, liabilities and more. 

Significance of the Cost Accounting Process

  • Material Cost Control
  • Labor Cost Control
  • Overheads Control
  • Assessing Efficiency
  • Expansion
  • Budgeting and
  • Price Determination

Material Cost Control

Material cost is a crucial category of cumulative product cost. It may be influenced by regular spares and material supply for production, retaining optimum fund level in material stores and stocks. It is always a good idea to keep an account of the material requirement, make a budget of the procurement each day or week or month and then start planning the material cost control. 

Labor Cost Control

If workers finish their job within the time specified, the labour cost can be monitored.

Overheads Control

By maintaining a stringent check over several overheads like a factory, organisation and distribution and selling,  this may be regulated.

Assessing Efficiency

It provides heeding data standards and real undertaking of the problem for gauging efficiency.

Budgeting

Budget preparation is the process of costing division. It is performed to guarantee that the feasible course of activity can be ruled out. The tangible performance conforms to the budgeted or estimated accomplishment.

Determination of Price

Because of costing information, the administration is facilitated to remedy remunerative selling costs for several items, services and products in different situations.

Expansion

The administration might formulate its strategy to proliferation on the rationale of calculations of generation at various phases.

Cost Accounting Advantages/ Advantages of Costing

These are the benefits of cost analysis:

  • Advantages for the administration
  • Advantages for the workers
  • Advantages for the creditors
  • Benefits for the government and
  • Benefits for the public

Also Read: What is Inventory Management Software System?

Advantages of Costing for the Administration

  • Encourages planning
  • Enables formulating strategies
  • Helpful in establishing performance standards and objectives 
  • Facilitates expense comparison
  • Guides to productive cost control
  • Specifies the selling cost
  • Ascertains revenue of every activity
  • Helps the administration in making decisions
  • Boosts cost rebate
  • Measures accomplishment

Benefits for the Employees

  • Guarantees fair incentive salary strategies

  • Promotes job security, distinction and growth
  • Helpful in gauging employee administering efficiency 

Benefits for the Creditors

  • Gauges the financial creditworthiness and strength of the business
  • Persuading investors to expand their credit capabilities
  • Creates dependability in the banks, creditors, and debenture proprietors

Advantages of Costing for the Government

  • Cost Accounting helps to develop business strategies and national agendas for industrial advancement.
  • It facilitates taxation assessment and index establishment
  • It helps in the productive utilisation of reserves, i.e. machines, materials, and labor etc.
  • It encourages the administration for cost compression, price aspect, import and export and granting pension etc.

Also Read: All Facts and Figures About the Nominal Account in Accounting

Conclusion:

Cost accounting tends to be a cost control practice which is defined as follows.

It is a department of systematic understanding that in itself is a discipline. It comprises its conventions, principles, and concepts which might vary from one industry to another.

It is both art and science. It is a science as it is an essence of systematic understanding pertaining to a wide variety of topics, and it is an art also because minus the cost auditor experience and efficiency, it is impossible to employ costing strategies efficiently. 

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FAQs

Q: How does costing help the administration?

Ans:

Cost accountings tend to be beneficial to the administration in taking judgment regarding

  • Commodity discontinuation or production
  • Idle capacity utilisation
  • The most productive sales compound
  • Alternative established on key factors
  • Export ruling and
  • Buy or Make decisions

Q: What are the benefits of costing for the public?

Ans:

  • the customers to pay a reasonable price for commodities
  • It oversees the advancement of national monetary growth
  • Establishes emIt assists in waste elimination and in handling inefficiency
  • It encouragesployment alternatives
  • Enhances the living dogmas of the society

Q: What is the life cycle costing?

Ans:

Life cycle costing provides a conclusion of the expense that a purchase will get in its life. The calculation generally implicates augmenting six kinds of costs:

  • Depreciation costs
  • Production costs
  • Operational costs
  • Maintenance costs
  • Financing costs and 
  • End-of-life costs

Q: How do you define process costing?

Ans:

Process costing tends to be an accounting method that tracks and accumulates explicit costs and direct-indirect expenses of a generation cycle. Costs are appointed to products, generally in a huge batch, which may include a full month's production.

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The information, product and services provided on this website are provided on an “as is” and “as available” basis without any warranty or representation, express or implied. Khatabook Blogs are meant purely for educational discussion of financial products and services. Khatabook does not make a guarantee that the service will meet your requirements, or that it will be uninterrupted, timely and secure, and that errors, if any, will be corrected. The material and information contained herein is for general information purposes only. Consult a professional before relying on the information to make any legal, financial or business decisions. Use this information strictly at your own risk. Khatabook will not be liable for any false, inaccurate or incomplete information present on the website. Although every effort is made to ensure that the information contained in this website is updated, relevant and accurate, Khatabook makes no guarantees about the completeness, reliability, accuracy, suitability or availability with respect to the website or the information, product, services or related graphics contained on the website for any purpose. Khatabook will not be liable for the website being temporarily unavailable, due to any technical issues or otherwise, beyond its control and for any loss or damage suffered as a result of the use of or access to, or inability to use or access to this website whatsoever.
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Disclaimer :
The information, product and services provided on this website are provided on an “as is” and “as available” basis without any warranty or representation, express or implied. Khatabook Blogs are meant purely for educational discussion of financial products and services. Khatabook does not make a guarantee that the service will meet your requirements, or that it will be uninterrupted, timely and secure, and that errors, if any, will be corrected. The material and information contained herein is for general information purposes only. Consult a professional before relying on the information to make any legal, financial or business decisions. Use this information strictly at your own risk. Khatabook will not be liable for any false, inaccurate or incomplete information present on the website. Although every effort is made to ensure that the information contained in this website is updated, relevant and accurate, Khatabook makes no guarantees about the completeness, reliability, accuracy, suitability or availability with respect to the website or the information, product, services or related graphics contained on the website for any purpose. Khatabook will not be liable for the website being temporarily unavailable, due to any technical issues or otherwise, beyond its control and for any loss or damage suffered as a result of the use of or access to, or inability to use or access to this website whatsoever.