COST ACCOUNTING THEORIES

1.0 INTRODUCTION

The word Cost isdefined as the total amount of expenditure already incurred or yet to beincurred in the course of manufacturing a product or rendering a service. Theprocess of classifying and estimating the total amount of expenditure that areyet to be incurred is referred to as cost analysis .Cost analysis thereforerepresents an amalgamation of cost, classification and cost estimation .Costclassification represents a logical groupings of the various item of costaccording to particular yardstick, parameter or basis. It is however, importantto note the different items of cost.

1.2 DEFINITIONS OF COST ACCOUNTING

The C1MA OfficialTerminology (1991) defines cost accounting as:”The establishment ofbudgets, standard costs and actual costs of operations, processes, activitiesor products; and the analysis of variances, profitability or the social use offunds”.

The BPP Study TextCost Accounting puts it like this:”Cost accounting is a managementinformation system which analyzes past, present and future data to provide thebasis for managerial action”.

Shukla and Grewal(1977:1125)’ See Cost Accounting as – classifying,   recording  and appropriate allocation of expenditure for .the determination of thecosts of products or services; and for the presentation of suitably arranged,data for purposes_; of control, .and guidance of the management. Itincludes the ascertainment of the cost of every order, job, contract, process,services or such unit of output as may be appropriate. It deals with the costof production, selling and distribution. Costing means such an analysis ofinformation as to enable management to know the cost of producing and selling,that is, the total cost of various products and services and also to know howthe total cost is constituted.

Osisioma (1990:85)defines cost accounting as The systematic analysis and recording of financialtransactions in respect of material, labor and expense, the collation of andinterpretation of these records   to   disclose  costs  of particular  products, or  services,   and  ‘ne application of this financial information for purposes of efficientrunning on the business.

According to Izejelue(2001:254) however, Cost Accounting is the branch of accounting which is designed specifically tomeasure the economic resources exchanged or consumed (or to be exchanged orconsumed) in the production of goods or services. It provides management withInformation about the estimated arid actual cost of products or services beingproduced and sold, and the analysis of thevariances between estimated and actual costs. The uses of costaccounting data include inventory valuation, cost control, revenue decisions,and performance evaluation. The cost accounting data are provided to managementto enable it reach informed decisions on a number of issues such as whether toproduce or delete; to manufacture or acquire; to close or continue; to buy orlease; to expand or contract;   topromote or demote; to increase or reduce price.

For Meigs and Meigs et al (1996:31) Cost Accounting is “Knowingthe cost of each business operation and of manufactured product is essential tothe efficient management of a business. Determining the per- unit cost ofbusiness activities and of manufactured products, and interpreting the costdata, comprise a specialized field call cost accounting.’

Cost accounting emphasizes the determination of what it cost toperform specific business activities and to manufacture products

Also Bhanacharyya andDeardcn  (1980:313),  are of the opinion that where cost accountingis used to determine product cost  inmanufacturing operation,., these costs have four principal uses in business asfollows:

(1)       Inventory valuation   (2 )Revenue decisions:     (3)Diagnosis and

(4)        Cost control.

1.3   COST CLASSIFICATIONS

Cost may beclassified according to the following basis:

(a)Behavioral Classification:

(i)    Variable cost

(ii)    Fixed cost  

(iii)Mixed cost

(iv)  Stepped cost

(b)Nature Classification:

(i)    Material cost

(ii)    Labor cost

(iii)  Overhead cost

(c)Controllability Classification:

(i)     Controllable cost

(ii)    Uncontrollable cost

(d)Traceability Classification:

(i)     Direct cost

(ii)   Indirect cost

(e)Functional Classification:

(i)Manufacturing or Production cost

(ii)Administrative cost

(iii)Selling and Distribution cost

(iv)Repairs and Maintenance cost

(v) Insurancecost etc. Cost information are needed to help managers

1. Setselling prices
2. Determiningthe cost of goods sold.
3. Evaluatemanufacturing efficiency
4. Planfor the future and
5. Controlcost

     1.4   IMPORTANCE OF COSTACCOUNTING

Shukia and Grewal(1977:1125) noted that Costing Accounting as a branch of accounting hasdeveloped because of the limitations of financial accounting. They observedthat, the following are the chief advantages which a concern can derive from cost accounting

1. A cost Accounting system enables a concern to-first measure itsefficiency and then to maintain and improve it. This is done by comparing cost per unit in one-period with that inanother actual cost with the standard.
2. Costing will reveal activities which bring profits and those thatresults in losses.
3. In case a firm is in a position to fix prices for its products,costing will help it to do so. In case of big contracts no quotations can bemade unless the cost of completing a contract can be ascertained.
4. In depression or slumps it becomes necessary to reduce the priceeven below the cost. Cost Accounting helps management to determine the properreduction.
5.  Costing helps management toplan its various activities.   This isbecause under a proper costing system, full information about productionfacilities will be maintained.
6. Information about availability of various stores and materialshelps in planning w^:ork and in detecting unnecessary losses.
7. Some of the important decisions e.g., whether or not to replacemen by machines or the decision to make an article or buy it from the market –cannot be made without proper costing information.
8. Exact causes of profits or losses will be revealed.
9. Cost Accounting  inculcatesthe habit of making calculations before taking a decision.
10. A good system of costing affords an independent and most reliablecheck on the accuracy of financial accounts.  The check operates through reconciliation, of profits shown by costingand by financial accounts (of course, using interlocking system).

                      Thus, cost accounting, as noted,has  the following very important  area of concern;

• Analysis and recording of financial transactions as they concernmaterials, labor an expenses – i.e.; elements of cost.
• Collation and interpretation of the records to disclose costs ofparticular products, job services – i.e., costing;
• Presentation and application of cost information for the efficientmanagement of the business i.e. cost accountancy, which encroaches uponManagement Accounting.
• Similar to those used in job costing. The distinguishing featureof batch costing being that  the costunit (the batch) is a separate, readily identifiable .group of units whichmaintain  their separate identitythroughout the production process.
• Single or output costs is the method applied by firms whichproduce only One product measurable in quantity, e.g. coal.
• Process costs mean a method followed by concerns where the finalproduct emerges after two or three distinct stages as in case of paper or oil.
• Operating costs mean ascertaining the cost of a service rendered(rather than a product produced).   Thesystem is followed by concerns like transport companies, electricity undertakings,etc.
• Multiply costing is applied by concerns producing a number ofproducts, e.g. toys, product will have to be ascertained usually by followingtwo or more methods because of different nature of work. If the products aremade in batches, the cost  of each batchwill be  batch costs.
• Departmental costs are used where a factory is divided into anumber of departments and where, first, the cost of running a department isascertained and then it is analyzed to give the cost of goods or servicesproduced there. From another point of view, the following methods may benoted:-
• Marginal costs: meaning the variable cost ofproducing a unit of output. It means that while ascertaining cost per unit,fixed or constant expenses are not taken into account.
• Uniform costing: is the name given to a common system of costingin all respects followed by a number of firms in the same industry. This helpsin comparing performance of one firm with that of another.
• Standard costing which consists of determining cost beforehand onsomewhat idealistic lines and then comparing the actual costs and standardcosts, ascertaining the reasons fordiscrepancies