UNDERSTANDING AND CLASSIFYING COSTS
COST ACCOUNTING
In the initial stages cost accounting was merely considered to be a technique for ascertainment of costs of products or services on the basis of historical data. In course of time it was realised, due to competitive nature of the market, that ascertainment of cost' was not so important as controlling costs was. Hence, cost accounting is considered more as a technique for `cost control' rather than as a technique merely for cost ascertainment. Due to technological developments in all fields, `cost reduction' has now come within the ambit of cost accounting. Cost accounting is thus concerned with:
Ascertaining the costs.
Controlling the costs.
Reducing the costs
Cost Accountant is concerned with costs and hence it will be of relevance to us to understand the meaning of the term `Cost' in a proper perspective.
In general, cost means the amount of expenditure (actual or notional) incurred on, or attributable to a thing. For example, if you have purchased a book for Rs. 150, it can be said that the cost of the book to you is Rs.150. Similarly, if furniture manufacturer makes a table by paying Rs.500 for timber, Rs 20.0 as carpenter's wages and Rs.100 as rent of the works, it can be said that the table cost him Rs.800. It may be noted, however, that the term cost cannot be exactly defined. Its interpretation depends on:
the nature of the business or industry; and
the context in which it is used.
In a business where selling and distribution expenses are quite nominal, the cost of the article may be calculated without considering the selling and distribution overheads. In a business where the nature of the product requires heavy selling and distribution expenses, the calculation of cost without taking into account selling and distribution expenses may prove very costly to the business. Further the costs may pertain to factory, office or other establishment aspects of operations. For example, prime cost , includes expenditure on direct materials, direct labour and direct expenses. Money spent on materials is termed as cost of materials, that spent on labour as cost of labour and so on. Thus, the use of the term `cost' without background information may be quite misleading.
It may also be noted that there is no such things as an exact cost or a true cost because no figure of cost is true in all circumstances and for all purposes. Many items of cost of production are handled in an optional manner which may give different costs for the same product or job without going against the accepted principles of cost accounting Depreciation is one such item. Its amount varies in accordance with the method of depreciation being used. However, endeavor should be made to obtain as far as possible the accurate cost of a product or service
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