Tag: Costs

  • Standard Cost and Estimated Cost Difference

    Standard Cost and Estimated Cost Difference

    Difference between Standard Cost and Estimated Cost; Standard costs stand used as a criterion for evaluating cost savings. Because the purpose of setting standards is to ensure that costs do not exceed certain limits. The actual one stands compared with the standards and the necessary measures stand taken based on the differences. On the other hand, the control aspect stands not included in the estimated costs. Because in the case of Estimated Expenditures, no further action stands taken. And in most cases, the estimated costs stand used to prepare and submit bids and set costs.

    Here are the articles to explain, The distinction and difference between Standard Cost and Estimated Cost!

    Standard costs exist usually determined based on scientific and technical analysis. However, estimated costs exist determined only based on past cost data and expected future changes. In this way, the estimated costs differ from the standard costing, and the differences between them exist mainly based on how the costs exist determined in advance.

    What is the standard cost?

    Standard cost is a planned or budgeted cost. The standard price stands based on engineering designs and production methods that can obtain under normal commercial conditions. It consists of materials, labor, and overhead parts and is normally part of the BOM.

    What is the estimated cost?

    Estimated costs are projections of the number of costs that will incur in producing a product or building a building. This amount obtains as part of the capital budgeting process for the internal project or as part of the sales offer if you are trying to sell to a client. The party paying the estimated costs may exist held at the level of the projection under the terms of the fixed price contract.

    The distinction and difference between Standard Cost Vs Estimated Cost;

    Although both estimated costs and standard costs stand computed in advance of production, and are, therefore, predetermined costs, estimated costs differ from standard costs in the following respects;

    Objective Difference:

    Estimated costs exist intended to ascertain what the costs will be while standard costs aim at what costs should be.

    Calculation Difference:

    Estimated costs stand calculated based on past performance standing adjusted in the light of anticipated changes in the future. Standard costs, on the other hand, stand ascertained on a scientific basis keeping in view certain conditions of efficiency.

    Computation Difference:

    Estimated costs stand for predetermined costs based on past performance and adjusted for anticipated future changes. They stand thus established in advance as the best estimates subject to the assumption that costs are free to move as they like. Standard costs, on the other hand, represent a carefully formulated advance estimate of what future costs should be under conditions expected to prevail. They are based on technical and engineering estimates. As such, they stand for planned costs expected to achieve in a particular production process under normal conditions.

    Aid to Management Difference:

    Estimated costs are not helpful to management in accomplishing management functions as they stand not scientifically predetermined costs. But standard costs involve operational analysis and evaluation and a comprehensive review of internal and external factors. They become reliable yardsticks for product costing, product pricing, planning, coordination, and price control purposes.

    Emphasis Difference:

    Estimated costs emphasize the cost with which it stands compared at the end of the accounting period. If the estimated costs stand found higher or lower than actual costs, they stand revised for use in the next accounting year. In standard costing the emphasis stands to put on standard costs, i.e., what costs of material labor and overhead should incur if the factory is to operate as a highly efficient unit.

    Under standard costing, actual costs stand ascertained only to facilitate their comparison with standard costs. Historical costs emphasize what the ‘costs are’ while estimated costs emphasize what the ‘cost will be’. Standard costs, on the other hand, emphasize what the ‘costs should be’.

    Use Difference:

    The estimated costs stand used only as statistical data, whereas standard costs exist used as a regular system from which variances stand ascertained and the reasons for such variances exist analyzed, and corrected measures stand taken promptly. In an estimated costing system, the emphasis is on cost ascertainment for fixing selling prices.

    As such, estimated costs are not of much practical significance from the point of view of cost control. Standard costing, on the other hand, being precise, provides a scientific basis with which actual costs stand compared. Accordingly, standard costs serve as an effective tool for cost control.

    Accuracy Difference:

    Being based on the average of past costs adjusted for anticipated changes in the future, estimated costs are less likely to be precise. However, standard costs stand fixed only after scientific analysis of relevant factors having a bearing upon costs. As such, standard costs tend to be more precise and accurate than estimated costs.

    Accuracy and Reliability Difference:

    Standard costing is a scientific method of cost control and it is more reliable and accurate, whereas estimated costs are not so precise and reliable.

    Records Difference:

    Estimated costs are statistical. As such, they are not a part of the accounting system. They stand only posted in the cost sheet for comparison. They stand used as statistical data for future costs. But, standard costs are a part of the accounting system. They have a place in the accounting records and stand used for ascertaining variances from the actual costs.

    Revision Difference:

    The estimated cost stands adjusted to the actual cost and expected changes in the coming period. While Standard Cost exists not generally revised unless it has existed set incorrectly or it has become irrelevant to the changed situations. Thus, Standard Cost is free from frequent changes or modifications.

    Stability Difference:

    Standard costs are more stable than estimated costs because estimated costs stand set on the assumptions of free movement of cost.

    Barometer of Efficiency Difference:

    Estimated Cost—being only an expression of likely cost in the future—cannot use to measure efficiency or otherwise. But the standard cost stands used as a barometer of efficiency since it compares with the actual cost.

    Applicability Difference:

    Estimated costs are generally applicable to concerns engaged in construction work such as buildings, factories, bridges, ships, and other types of concerns such as bakeries, bottling companies, medicines, and dairy products. Although the principles underlying standard costing can apply to any industry, standard costs are most suitable for industries engaged in mass production.

    The distinction and difference between Standard Cost and Estimated Cost Image
    The distinction and difference between Standard Cost and Estimated Cost
  • Construction, Costs Associated, and Techniques of Plant Layout

    Construction, Costs Associated, and Techniques of Plant Layout

    Construction, Costs Associated, and Techniques of Plant Layout…

    Construction of Plant Building:

    For effective and efficient operation of the plant, the design of the building is one of the main considerations. The building housing the plant should be designed in such a way that it can meet the requirements of the concern’s operations and its layout.

    According to James Lundy,

    “An ideal plant building is one which is built to house the most efficient layout that can be provided for the process involved, yet which is architecturally ultra active and of such a standard shape and design as most flexible in its use and expensive units construction.”

    The layout may be said to be efficient if it is housed in a building that ensures comfort and health of workers engaged in the plant concerning heat, light, humidity, circulation of air, etc. and on the other hand, it protects the plant and equipment and materials from the weather.

    There are several factors which are to be considered in constructing a new building for housing the plant. These are:

    Adaptability:

    The building structure should be adaptable fully to the needs and requirements of the plant. In the beginning, most of the enterprises carry their business in a rented building which is generally not suitable to the needs and special requirements of the industries with the obvious reason that landlord constructs the building to suit average conditions of a manufacturing unit and they cannot be persuaded to make the necessary changes affecting the flexibility. As to the degree of adaptability, it may be needed that buildings are more easily adapted to fit the needs of the continuous process than to those of any other.

    Provision for additions and extensions:

    In designing and constructing a new factory building, care must be taken to provide for additions and extensions which may arise to meet the necessary and peculiar needs in due course of time. There must be every possibility to add new units without disturbing the existing manufacturing system. Kimball and Kimball have rightly suggested that “an ideal building plan is one built on some (unit) system like a sectional bookcase so that additional units can be added at any time without disturbing the manufacturing system and organization”. As a general rule extension can be made most conveniently at right angles to the direction of flow of work.

    The number of stories:

    Another important decision while designing new plant building is to consider the number of stories to be built, Le., whether the building should be single-stories or multi-stories. The choice between single and multi-stories depends obviously on various factors such as the nature of the product, proposed layout, the value of land, the cost of construction. Before deciding the number of stories, the management should bear in mind the comparative advantages and disadvantages of one story and many stories.

    Costs Associated With Plant Layout:

    The costs associated with a decision on plant layout are;

    • Cost of movement of materials from one work area to another.
    • The cost of space.
    • Cost of a production delay, if any, which are indirect costs.
    • Cost of spoilage of materials, if any, when the materials are stacked or stored in conditions which deteriorate the quality of the material.
    • The cost of labor dissatisfaction and health risks.
    • Cost of changes required, if the operational conditions change in the future. This is a long-term cost.

    A good layout should minimize all these costs put together.

    Techniques of Plant Layout:

    In designing or improving the plan of plant layout, certain techniques or tools are developed and are in common use today.

    The techniques or tools are as follows;

    Charts and Diagrams:

    To achieve work simplification, production engineers make use of several charts and diagrams for summarising and analyzing production process and procedures.

    These include;

    • Operation Process chart: It subdivides the process into its separate operations and inspections. When a variety of parts and products are manufactured which follow different parts across several floor areas, an operation process chart may be necessary for the important material items or products. The flow lines on the chart indicate the sequence of all operations in the manufacturing cycle.
    • Flow process chart: This chart is a graphic summary of all the activities taking place on the production floor of an existing plant. By preparing this type of chart, it can be found out as to where operations can be eliminated, rearranged, combined, simplified or sub-divided for greater economy. This chart will also identity inflexible processes which cannot be adapted to the output of redesigned models or related outputs.
    • Process flow diagram: The diagram is both a supplement and substitute of process flow chart. It helps in tracking the movement of material on a floor plan or layout drawing. A diagram may be drawn to scale on the original floor plan to show the movement of work. It is a good technique to show long material hauls and backtracking of present layouts, thereby indicating how the present layout may be improved. The flow of several standard products can be shown by colored lines.

    This diagram can be used to analyze the effectiveness of the arrangement of plant activities, the location of specific machines, and the allocation of space. It shows how a more logical arrangement and economical flow of work can be devised.

    Machine data card:

    This card provides full information necessary for the placement and layout of equipment. The cards are prepared separately for each machine. The information generally given on these cards include facts about the machine such as the capacity of the machine, space occupied, power requirements, handling devices required and dimensions.

    Templates:

    The template is the drawing of a machine or tool cut out from the sheet of paper. The area occupied by a machine is shown by cutting to scale. The plant layout engineer prepares a floor plan based on relevant information made available to him.

    Templates representing machines, tools, conveyors, furnaces, ovens, inspection stations, tanks, storages, bins, trucks etc. are then laid out on the floor plan according to the sequence or groupings indicated on the operation process chart and the overall layout plan prepared by the engineers and helps in trying out at possible alternative arrangements.

    The template technique is important because;

    • It eliminates unnecessary handlings.
    • Minimized backtracking of materials.
    • It makes the mechanical handling possible.
    • They provide a visual picture of the proposed or existing plan of the layout at one place, and.
    • They offer flexibility to meet future changes in production requirements.
    Scale models:

    Though two-dimensional templates are now in extensive use in the field of layout engineering it is not of much use to executives who cannot understand and manipulate them. One important drawback of the template technique is that it leaves the volume, depth, height, and clearances of machines to the imagination of the reader of the drawing.

    These drawbacks of template technique have been removed through the development of miniature scale models of machinery and equipment cast in metal. With scale models, it has now become possible to move tiny figures of men and machines around in miniature factors. The miniature machines and models of material handling equipment are placed in a miniature plant and moved about like pawn on a chessboard.

    Layout drawings:

    Completed layouts are generally represented by drawings of the plant showing walls columns, stairways, machines and other equipment, storage areas and office areas.

    The above techniques and tools are used for the planning of layout for the new plant.

  • Process Costing: Meaning, Characteristics, and Objectives

    Process Costing: Meaning, Characteristics, and Objectives

    Process Costing is a method of costing used to ascertain the cost of a product at each process or stage of manufacture. You will be able to understand the Process Costing based on the points given to them; 1) introduction, 2) meaning of process costing, 3) definition of process costing, 4) characteristics of process costing, 5) objectives of process costing, and 6) principles of process costing. In this method, the costs of materials, wages and overheads are accumulated for each process separately, for a gives period, and then carrying forward cumulatively from one process to the next process till the last process complete.

    This article explains the topic of Process Costing: Introduction, Meaning, Definition, Characteristics, Objectives, and Principles.

    Process costing is probably the most widely used method of cost ascertainment. Records are also maintaining to account for process losses. These losses may be normal or abnormal. Separate accounting is done for normal and abnormal losses, opening and closing work-in-progress and inter-process profits, if any. This method of costing used in those industries where mass production of identical units undertakes continuously and finish products are subject to several production stages call processes before completion.

    The system of process costing is suitable for industries involving continuous production of the same product or products through the same process or set of processes. It is in use in the plant producing paper, rubber products, medicines, chemical products. It is also very much common in flour mill, bottling companies, canning plants, breweries, etc.

    Meaning of Process Costing:

    They refer to a method of accumulating the cost of production by the process. It uses in mass production industries producing standard products like steel, sugar, chemicals, oil, etc. In all such industries, goods produced are identical and all factory processes are standardizing. Output in such industries consists of like units and every unit of the product undergoes a similar operation in the process.

    So it implies that the same cost of material, labor and overhead charges to each unit of the production process. Under this method, costing an individual unit is impossible. It so-calls because under process costing cost of the product ascertain process-wise.

    They also know as “Continuous Costing” because industries that adopt process costing undertake the production of goods continuously. They also know as “Average Costing” because the cost per unit of each process ascertains by averaging the expenditure incurred on that process during a period by the number of units produced in that process during the period.

    Definition of Process Costing:

    After their meaning, Process Costing defines by different scholars as under:

    According to Wheldon,

    “Process costing is a method of costing used to ascertain the cost of the product at each process, operation or stage of manufacture.”

    According to the Institute of Cost and Management Accountants, London,

    “Process costing is that form of operation costing which applies where standardized goods are produced.”

    Characteristics or Features of Process Costing:

    It is that aspect of operation costing which uses to ascertain the cost of the product at each process or stage of manufacture. Where processes are carrying on having one or more of the following characteristics of Process costing:

    • Production over having a continuous flow of identical products except. Where plant and machinery are shut-down for repairs, etc.
    • Clearly defined process cost centers and the accumulation of all costs (materials, labor, and overheads) by the cost centers.
    • The maintenance of accurate records of units and part units produced and cost incurred by each process.
    • The finished product of one process becomes the raw materials of the next process or operation and so on until the final product obtains.
    • Avoidable and unavoidable losses usually arise at different stages of manufacture for various reasons. Treatment of normal and abnormal losses or gains is to study in this method of costing.
    Extra characteristics:
    • Sometimes goods are transferring from one process to another process, not at cost price but transfer price just to compare this with the market price and to have a check on the inefficiency and losses occurring in a particular process. The elimination of the profit elements from stock is to learn in this method of costing.
    • To obtain accurate average costs, it is necessary to measure the production at various stages of manufacture. As all the input units may not convert into finish goods; some may be in progress. The calculation of effective units is to learn in this method of costing.
    • Different products with or without by-products are simultaneously producing at one or more stages or processes of manufacture. The valuation of by-products and apportionment of the joint cost before the point of separation is an important aspect of this method of costing. In certain industries, by-products may require further processing before they can sell.
    • The main product of one firm may be a by-product of another firm and in certain circumstances. It may be available in the market at prices which are lower than the cost to the first-mentioned firm. It is essential, therefore, that this cost knows so that advantages can take of these market conditions.
    • The output is uniform and all units are identical during one or more processes. So the cost per unit of production can ascertain only by averaging the expenditure incurred during a particular period.

    Process Costing Meaning Characteristics and Objectives
    Process Costing: Meaning, Characteristics, and Objectives, #Pixabay.

    Objectives of Process Costing:

    How do you know what cost you need? If you know the total cost of production of each process. The following are the main objectives of process costing:

    1. To Ascertain the Cost of Each Process: It is necessary to know the cost at every stage of production and this fulfills by the process costing method. On this basis, management can decide concerning the make or buy the required commodities.
    2. To Ascertain the Cost of Bye-Product: Bye-product is that which obtains with the main product in the course of the production. For example; while producing mustard oil, the cake also obtains. Which terms as bye-product and the cost of which is necessary to know the actual cost of the main product? Cost of bye-product ascertains by preparing bye-product Account, under process costing.
    3. To Know the Wastage in Each Process of Production: During the courage of production, different wastages, such as; loss in weight, normal wastage, and abnormal wastage, etc. may arise. Management of any concern may know about these wastages by Process Costing Account.
    4. To Ascertain the Profit or Loss of Each Process: The output or the part of output at the stage of every process can sell out either at profit or loss. Thus the management can know about the profit or loss at every process by preparing Processes Account.
    5. The base of the Valuation of Opening and Closing Stock of Each Next Process: If the total cost of production of any process divides by the number of units, we get the cost of production per unit of that particular process and on this basis opening and closing stock of next process value.

    Principles of Process Costing:

    The essential stages in principles of process costing are:

    The factory divide into several processes and an account maintains for each process. Each Process Account debit with material cost, labor cost, direct expenses, and overheads allocate or apportion to the process.

    The output of a process transfer to the next process in the sequence. In other words, the finished output of one process becomes input (materials) of the next process. The production records of each process are keeping in such a way as to show. The quantity of production and the wastage and scrap and the cost of production of each process for each period.

    Extra things:
    • In some cases, the whole output of one process not transfers to the next process. A part of the output may transfer to the next process. And, a certain portion of the output may sell in semi-finish form or may keep in stock and transfer to Process Stock Account. If the output of any process sells at a profit in semi-finish form. Then profit on that particular sale will show on the debit side of that concerning profit, as profit on goods sale or transfer.
    • In case there is loss or wastage of units in any process. The loss has to born by the good units produced in that process and as a result. The average cost per unit increases to that extent. It may note that, if there is loss or wastage in any process, the quantity of loss or wastage should enter on the credit side of the concerned Process Account in the quantity column. In case the wastage has some scrap value. It should appear on the credit side of the concerned Process Account in the value column against the entry for wastage. But, if the scrap value of the wastage does not specifically give in the problem. It should take as nil.

    The total cost of production of each process for a particular period divided by the number of units produced in that process during that period. And, the average cost per unit of production for a period obtain. The finished output of the last process transfer to the Finish Goods Account.

  • How to the Classification of Cost according to 4 functions?

    How to the Classification of Cost according to 4 functions?

    Classification of Cost according to 4 functions: This is a traditional classification. A business has to perform several functions like manufacturing, administration, selling, distribution, and research.

    This article explains the topic of the Classification of Cost according to 4 functions.

    Cost may have to ascertain for each of these functions.

    On this basis, costs are classifying into the following groups:

    How to the Classification of Cost according to 4 functions
    How to the Classification of Cost according to 4 functions?

    Manufacturing costs:

    This is the cost of the sequence of operations. Which begins with supplying materials, labor, and services and ends with the completion of production. What are the manufacturing costs? Manufacturing costs are the costs of materials plus the costs to convert the materials into products. Manufacturing costs are the costs incur during the production of a product.

    The costs are typically present in the income statement as separate line items. An entity incurs these costs during the production process. Direct material is the materials uses in the construction of a product. Direct labor is that portion of the labor cost of the production process that assigns to a unit of production. Manufacturing overhead costs are applying to units of production based on a variety of possible allocation systems. Such as by direct labor hours or machine hours incurred.

    Administration costs:

    This is general administrative cost and includes all expenditure incurs in formulating the policy, directing the organization and controlling the operations of an undertaking. Which is not directly related to production, selling and distribution, research and development activity or function.

    Define administrative costs as the costs not directly related to operations. Generally, they are incurring in the process of directing a company. These costs, though indirect, are still important because they assist those who operate and sell company products by making their work more efficient.

    Selling and distribution costs:

    Selling cost is the cost of seeking to create and simulating demand and securing orders. Distribution cost is the cost of a sequence of operations. This begins with making the packed product available for despatch and ends with making the reconditioned returned empty package for re-use. There are some overhead about them;

    • What is Selling Overhead? Selling overhead is the indirect expenses incur for seeking to create and stimulate demand for the product and up to the stage of securing orders.
    • What is Distribution Overhead? Distribution overhead is the expenses incurred in connection with the execution of an order. It begins with making the packed product available for dispatch and ends with making the reconditioned empty package, if any, available for re-use.

    The various items included in manufacturing administrative, selling and distribution costs ate available in Table:

    Functional Classification of Costs - Table
    Functional Classification of Costs – Table.

    Research and development costs:

    Research cost is the cost of searching for new or improved products or methods. It comprises wages and salaries of research staff, payments to outside research organizations, materials used in laboratories and research departments, etc. After completion of research, the management may decide to produce a new improved product or to employ a new or improved method.

    Development cost is the cost of the process which begins with the implementation of the decision to produce a new product or to employ a new or improved method and ends with the commencement of formal production of that product or by that method. Pre-production cost is that part of the development cost which incurs in making in trial production run preliminary to formal production.

  • What is the Cost concepts in Cost accounting? Discussion

    What is the Cost concepts in Cost accounting? Discussion

    Top 17 Cost concepts in Cost accounting: They are; 1) Product and period costs, 2) Common and joint costs, 3) Short-run and long-run costs, 4) Past and future costs, 5) Controllable and non-controllable costs, 6) Replacement and Historical Costs, 7) Escapable and unavoidable costs, 8) Out of pocket and Book Costs, 9) Imputed and Sunk Costs, 10) Relevant and Irrelevant Costs, 11) Opportunity and Incremental Costs, 12) Conversion cost, 13) Committed cost, 14) Shutdown and Abandonment costs, 15) Urgent and Postponable costs, 16) Marginal cost, and 17) Notional cost.

    Here are important topic or questions is Discussion; What is the Cost concepts in Cost accounting?

    A clear understanding of various cost concepts is essential for the study of cost accounting and cost systems.

    Top 17 Cost concepts in Cost accounting - List
    Top 17 Cost concepts in Cost accounting – List

    The description of these cost concepts follows now for cost accounting.

    1] Product and period costs:

    First Cost concepts; The product cost is the aggregate of costs that are associated with a unit of product. Such Costs may or may not include an element of overheads depending upon the type of costing system in force-absorption or direct. Product costs are related to goods produce or purchase for resale and are initially identifying as part of the inventory.

    These products or inventory costs become expenses in the form of the cost of goods sold only when the inventory sales. Product cost associated with the unit of output. The costs of inputs informing the product viz., the direct material, direct labor, factory overhead constitute the product costs. The period cost is a cost that tends to be unaffecting by changes in the level of activity during a given period. What is the importance of Cost accounting?

    The period cost associative with a period rather than manufacturing activity and these costs deduct as expenses during. The current period without have been previously classifying as product costs. Selling and distribution costs are period costs and are deducting from the revenue without their existence regard as part of the inventory cost.

    2] Common and joint costs:

    The common cost is an indirect cost that incurs for the general benefit of several departments or for the whole enterprise and which is necessary for present and future operations. The joint costs are the cost of either a single process or a series of processes. That simultaneously produce two or more products of significant relative sales value.

    3] Short-run and long-run costs:

    The short-run costs are costs that vary with the output when fixed plant and capital equipment remain the same and become relevant. When a firm has to decide whether or not to produce more in the immediate future. The long-run-costs are those which vary with the output when all input factors including plant and equipment vary and become relevant. When the firm has to decide whether to set up a new plant or to expand the existing one.

    4] Past and future costs:

    The past costs are actual costs incur in the past and are generally containing in the financial accounts. These costs report past events and the time lag between event and its reporting makes the information out of date and irrelevant for decision-making.

    These costs will just act as a guide for the future course of action. The future costs are costs expecting to incur at a later date and are the only costs that matter for managerial decisions because they are subject to management control.

    Future costs are relevant for managerial decision making in cost control, profit projections, appraisal of capital expenditure, the introduction of new products, expansion programs, and pricing, etc.

    5] Controllable and non-controllable costs:

    The concept of responsibility accounting leads directly to the classification of costs as controllable or uncontrollable. The controllable cost is a cost chargeable to a budget or cost center. Which can influence the actions of the person in whom control the center vests? It is always not possible to predetermine responsibility, because the reason for deviation from expected performance may only become evident later.

    For example, excessive scrap may arise from inadequate supervision or latent defect in purchased material. The controllable cost is a cost that can influence and regulate during a given period by the actions of a particular individual within an organization. The controllability of cost depends upon the level of responsibility under consideration.

    Direct costs are generally controllable by shop level management. The uncontrollable cost is a cost that is beyond the control of a given individual during a given period. The distinction between controllable and uncontrollable costs are not very sharp and may be left to individual judgment. Some expenditure which may uncontrollably on a short-term basis controllably on a long-term basis,

    There are certain costs which are difficult to control due to the following reasons.

    • Physical hazards arising due to flood, fire, strike, lockout, etc.
    • Economic risks such as increased competition, change in fashion or model, higher prices of inputs, import restrictions, etc.
    • Political risks like change in Government policy, political unrest, war, etc.
    • Technological risk such as a change in design, know-how, etc.

    6] Replacement and Historical Costs:

    The Replacement costs and Historical costs are two methods for carrying assets in the balance sheet and establishing the amounts of costs that use to determine income.

    • The Replacement cost is a cost at which material identical to that is to replace could purchase at the date of valuation (as distinct, from actual cost price at the date of purchase). The replacement cost is the cost of replacing an asset at any allow point of time either present or the future (excluding any element attributable to improvement).
    • The Historical cost is the actual cost, determined after the event. Historical cost valuation states the costs of plant and materials, for example, at the price originally paid for them whereas replacement cost valuation states the costs at prices that would have to pay currently.

    Costs reported by conventional financial accounts are based on historical valuations. But during periods of changing price level, historical costs may not be the correct basis for projecting future costs. Naturally historical costs must adjust to reflect current or future price levels.

    7] Escapable and unavoidable costs:

    The Escapable cost is an avoidable cost that will not incur if an activity does not undertakes or discontinue. The avoidable cost will often correspond-with variable costs. The avoidable cost can identify with an activity or sector of a business and which would avoid if that activity or sector did not exist. The escapable costs refer to costs that can reduce due to the contraction in the activities of a business enterprise. It is the net effect on costs that is important, not just the costs directly avoidable by the contraction. Examples:

    • Closing an unprofitable branch house-storage costs of other branches and transportation charges would increase.
    • Reducing credit sales costs estimated may be less than the benefits otherwise available.

    Note: Escapable costs are different from controllable and discretionary costs.

    8] Out of pocket and Book Costs:

    The out of pocket cost is a cost that will necessitate a corresponding outflow of cash. Also, the costs involving cash outlay or payment to other parties term as out of pocket costs. Book costs are those which do not require current cash payments.

    Depreciation is a notional cost in which no cash transaction involves. The distinction between out of pocket costs and book costs primarily shows how costs affect the cash position.

    Out of pocket costs are relevant in some decision-making problems. Such as the fluctuation of prices during the recession, make or buy decisions, etc. Book-costs can convert into out of pocket costs by selling the assets and having the item on hire. Rent would then replace depreciation and interest.

    9] Imputed and Sunk Costs:

    The imputed cost is a cost that does not involve actual cash outlay. Which uses only for decision making and performance evaluation. Imputed cost is a hypothetical cost from financial accounting. Interest on capital is a common type of imputed cost. No actual payment of interest makes but the basic concept is that had the funds been investing elsewhere they would have to earn interest. Thus, imputed costs are a type of opportunity costs.

    The Sunk costs are those costs that have been investing in a project and which will not recover if the project terminates. The sunk cost is one for which the expenditure has to take place in the past. This cost does not affect a particular decision under consideration. Sunk costs are always results of decisions accept in the past.

    This, the cost cannot change by any decision in the future. Investment in plant and machinery as soon as it installs its cost is sunk cost and is not relevant for decisions. Amortization of past expenses e.g. depreciation is sunk cost. Sunk, costs will remain the same irrespective of the alternative selected.

    Thus, it need not consider by the management in evaluating the alternatives as it is common to all of them. It is important to observe that an unavoidable cost may not be a sunk cost. The Managing Director’s salary is generally unavoidable and also out of pocket but not sunk cost.

    10] Relevant and Irrelevant Costs:

    The relevant cost is a cost appropriate in aiding to make specific management decisions. Business decisions involve planning for the future and consideration of several alternative courses of action. In this process, the costs which are affecting by the decisions are future costs. Such costs call relevant costs because they are pertinent to the decisions in hand. The cost is saying to be relevant if it helps the manager in taking. The right decision in furtherance of the company’s objectives.

    11] Opportunity and Incremental Costs:

    The opportunity cost is the value of a benefit sacrifice in favor of an alternative course of action. It is the maximum amount that could obtain at any given point of time. If a resource was selling or put to the most valuable alternative use that would be practicable.

    • The opportunity cost of a good or service measure in terms of revenue. Which could have been earning by employing that good or service in some other alternative uses. Opportunity cost can define as the revenue forgone by not making the best alternative use. Opportunity cost is the prospective change in cost following the adoption of an alternative machine process, raw materials, etc. It is the cost of opportunity lost by the diversion of an input factor from use to another.
    • The incremental cost is the extra cost of taking one course of action rather than another. It also calls at different costs. The incremental cost is the additional cost due to a change in the level of nature of the business activity.

    The change may take several forms e.g., changing the channel of distribution, adding a new machine, replacing a machine by a better machine, execution of export orders, etc. Incremental costs will be different in case of different alternatives. Hence, incremental costs are relevant to the management in the analysis of decision making.

    12] Conversion cost:

    The conversion cost is the cost incur for converting the raw material into the finished product. It refers to as the production cost excluding the cost of direct materials:

    13] Committed cost:

    The committed cost is a cost that primarily associates with maintaining the organization’s legal and physical existence over which management has little discretion. Also, the committed cost a fixed cost that results from the froth decision of the prior period.

    The amount of committed cost as fixed by decisions. Which makes in the past and not subject to managerial control in the short-run? Since committed cost does not fluctuate with volume and remains unchanged until action takes to increase or reduce available capacity.

    Committed cost does not present any problem in cost behavior analysis. Examples of committed costs are depreciation, insurance premium, rent, etc. This is an important Cost concept in accounting.

    14] Shutdown and Abandonment costs:

    The shutdown costs are the cost incur about the temporary closing of a department/division/enterprise. Such costs include those of closing as well as those of re-opening. Also, the shutdown costs asses as those costs which would incur in the event of suspension of the plant operation. And, which would save if the operations are continuing. Examples of such costs are the costs of sheltering the plant and equipment and construction of sheds for storing exposed property.

    Further, additional expenses may have to incur when operations are restoring e.g.. Re-employment of workers may involve the cost of recruitment and training. The Abandonment cost is the cost incur in closing down. Also, A department or a division or in withdrawing a product or ceasing to operate in a particular sales territory etc.. The abandonment costs are the cost of retiring altogether a plant from service; Abandonment arises when there is a complete cessation of activities and creates a problem as to the disposal of assets.

    15] Urgent and Postponable costs:

    The urgent costs are those which must incur to continue operations of the firm. For example, the cost of material and labor must incur if production is to take place. The Postponable cost is that cost which can shift to the future with little or no effect on the efficiency of current operations. These costs can postpone at least for some time, e.g., maintenance relating to building and machinery.

    16] Marginal cost:

    The marginal cost is the variable cost of one unit of a product or a service i.e., a cost that would avoid. If the unit did not produce or provide. In this context, a unit in usually either a single article or a standard measure such as a liter or kilogram. But may in certain circumstances be an operation, process or part of an organization.

    They are the amount at any allow volume of output by which aggregate costs are changing. If the volume of output increases or decreases by one unit. It uses full Cost concepts in accounting.

    The marginal costing technique is the process of ascertaining marginal costs and of the effects of changes in the volume of the type of output on profit by differentiating between fixed and variable costs.

    17] Notional cost:

    Final Cost concepts; The Constitutional or notional cost is hypothetical to take into account in a particular situation to re-present. As well as, the benefits enjoying by an entity in respect of which no actual expense incurs. Maybe you understand your misinformation of the cost concepts in cost accounting.

    What is the Cost concepts in Cost accounting Discussion
    What is the Cost concepts in Cost accounting? Discussion.

  • Techniques and methods of costing in Cost accounting

    Techniques and methods of costing in Cost accounting

    The techniques and methods of costing in Cost accounting are to explain their points one by one. First, Techniques of Costing: Historical Absorption, Marginal, Budget and Budgetary Control, Differential, and Standard Costing. As well as Methods of Costing: There are two methods of costing, namely; Job costing and Process costing.

    What are the techniques and methods of costing in Cost accounting? Discussion.

    In addition to the different costing methods, various techniques are also using to find the costs.

    Techniques of Costing:

    The following are the main types or techniques of costing for ascertaining costs:

    The techniques of costing in Cost accounting
    The techniques of costing in Cost accounting

    1] Historical Absorption Costing:

    It’s the ascertainment of costs after they have been incurring. It defines as the practice of charging all costs, both variable and fixed, to operations, process or products. It also knows as traditional costing. Its ascertainment of costs after they have been incurring. It aims at ascertaining costs incurred on work done in the past.

    It has a limited utility, though comparisons of costs over different periods may yield good results. Since costs are ascertaining after they have been incurring, it does not help in exercising control over costs. However, It is useful in submitting tenders, preparing job estimates, etc.

    2] Marginal Costing:

    It refers to the ascertainment of costs by differentiating between fixed costs and variable costs. In this technique, fixed costs are not treated as product costs. They are recovering from the contribution (the difference between sales and variable cost of sales).

    The marginal or variable cost of sales includes direct material, direct wages, direct expenses, and variable overhead. It is the ascertainment of marginal cost by differentiating between fixed and variable costs.

    It uses to ascertain the effect of changes in volume or type of output on profit. This technique helps management in taking important policy decisions such as product pricing in times of competition, whether to make or not, selection of product mix, etc.

    3] Budget and Budgetary Control Costing:

    A budget is a quantitative statement preparing before the defined period to help achieve certain objectives of the firm. When we talk about the techniques of costing, budgetary control is an important technique. This budget can be in the form of quantities or can be a monetary statement. A budget will lay down the objectives of this period, and the firm’s methods to achieve them.

    For example, a production budget will deal with quantities of goods to produce. On the other hand, a marketing budget will be a monetary statement. Another important feature of a budget is that it prepares ahead of time. So the budget can be for the next quarter or the next year or any such predetermined period.

    Budgetary control is the preparation of budgets and analysis of the actual performance of the firm in comparison to the budgeted numbers. If there is a lot of variation from the budget the firm can take corrective action. This is how budgetary control works.

    4] Differential Costing:

    Differential cost is the difference in total cost between alternatives-evaluate to assist decision making. This technique draws the curtain between variable costs and fixed costs. It takes into consideration fixed costs also (unlike marginal costing) for decision making under certain circumstances.

    This technique considers all the revenue and cost differences amongst the alternative courses, of action to assist management in arriving at an appropriate decision.

    5] Standard Costing:

    It refers to the ascertainment and use of standard costs and the measurement and analysis of variances. Standard cost is a predetermining cost that computes in advance of production based on a specification of all factors affecting costs. A comparison makes of the actual cost with a pre-arranged standard cost and the cost of any deviation (called variances) analyzes by causes.

    This permits management to investigate the reasons for these variances and to take suitable corrective action. The standards are fixed for each element of cost. To find out variances, the standard costs are comparing with actual costs. The variances are investigating later on and wherever necessary, rectification steps are initiating promptly. The technique helps in measuring the efficiency of operations from time to time.

    Methods of Costing:

    In this article, we are studying the topic techniques and methods of costing. After discussing the topic of Costing Techniques, so now we can study the topic of Costing Methods. The basic principles of ascertaining costs are the same in every system of cost accounting. However, the methods of analyzing and presenting the cost may vary from industry to industry. The method to use in collecting and presenting costs will depend upon the nature of production.

    The methods of costing in Cost accounting
    The methods of costing in Cost accounting

    There are two methods of costing, namely: Job costing and Process costing.

    A] Job costing:

    Job costing uses where production is not repetitive and is done against orders. The work usually carries out within the factory. Each job treats as a distinct unit, and related costs are recording separately. This type of costing is suitable for printers, machine tool manufacturers, job foundries, furniture manufactures, etc.

    The following methods are commonly associated with job costing:

    1] Batch costing:

    Where the cost of a group of product ascertains, it calls “batch costing”. In this case, a batch of similar products treats as a job. Costs are collecting according to batch order number and the total cost divide by the numbers in a batch to find the unit cost of each product. Batch costing generally follows in general engineering factories that produce components in convenient batches, biscuit factories, bakeries, and pharmaceutical industries.

    2] Contract costing:

    A contract is a big job and, hence, takes a longer time to complete. For each contract, the account keeps recording related expenses separately. It usually follows by concerns involve in construction work e.g. building roads, bridges, and buildings, etc.

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    B] Process Costing:

    Where an article has to undergo distinct processes before completion, it is often desirable to find out the cost of that article at each process. A separate account for each process opens and all expenses are charging thereon. The cost of the product at each stage is, thus, accounted for.

    The output of one process becomes the input to the next process. Hence, the process cost per unit in different processes adds to find out the total cost per unit at the end. Process costing is often found in such industries as chemicals, oil, textiles, plastics, paints, rubber, food processors, flour, glass, cement, mining, and meatpacking.

    The following methods are used in process costing:

    1] Output/Unit Costing:

    This method follows by concerns producing a single article or a few articles which are identical and capable of being expressed in simple, quantitative units. This uses in industries like mines, quarries, oil drilling, cement works, breweries, brickworks, etc. for example, a tone of coal in collieries, one thousand bricks in brickworks, etc.

    The object here is to find out the cost per unit of output and the cost of each item of such cost. A cost sheet prepares for a definite period. The cost per unit calculates by dividing the total expenditure incurred during a given period by the number of units produced during the same period.

    2] Operating Costing:

    This method is applicable where services are rendering rather than goods produce. The procedure is the same as in the case of unit costing. The total expenses of the operation are divide by the units and cost per unit of service arrives at. This follows in transport undertakings, municipalities, hospitals, hotels, etc.

    3] Multiple Costing:

    Some products are so complex that no single system of costing is applicable. Where a concern manufactures several components to assemble into a complete article, no one method would be suitable, as each component differs from the other in respect of materials and the manufacturing process.

    In such cases, it is necessary to find out the cost of each component and also the final product by combining the various methods discussed above. This type of costing follows to cost such products as radios, airplanes, cycles, watches, machine tools, refrigerators, electric motors, etc.

    4] Operating Costing:

    In this method, each operation at each stage of production or process is separately identifying and cost. Also, the procedure is somewhat similar to the one followed in process costing. Process costing involves the costing of large areas of activity whereas operation costing confines to every minute operation of each process.

    This method follows in industries with a continuous flow of work, producing articles of a standard nature, and which pass through several distinct operations sins a sequence to completion. Since this method provides for minute analysis of cost, it ensures greater accuracy and better control of costs.

    The costs of each operation per unit and cost per unit up to each stage of operation can calculate quite easily. This method is in force in industries were toys, leather, and engineering goods are manufacturing.

    5] Departmental Costing:

    When costs are ascertaining department by department, such a method calls “departmental costing“. Where the factory divides into several departments, this method follows. The total cost of each department ascertains and divides by the total units produced in that department to obtain the cost per unit. This method follows departmental stores, publishing houses, etc.

  • What is the Future and Historical Cost?

    Understand Future Cost and Historical Cost; Future cost of capital refers to the expected cost of funds to be raised to finance a project. In contrast, historical cost represents cost incurred in the past in acquiring funds. In financial decisions, future cost of capital is relatively more relevant and significant. While evaluating the viability of a project, the finance manager compares expected earnings from the project with an expected cost of funds to finance the project.

    Here are explained; What is the Future and Historical Cost?

    Likewise, in making financing decisions, the attempt of the finance manager is to minimize the future cost of capital and not the costs already defrayed. This does not imply that historical cost is not relevant at all. In fact, it may serve as a guideline in predicting future costs and in evaluating the past performance of the company.

    Future cost: Future costs are based on forecasts. The costs relevant for most managerial decisions are forecasts of future costs or comparative conjunctions concerning future situations. An estimated quantification of the amount of a prospective expenditure. Forecasting of future costs is required for expense control, the projection of future income statements; appraisal of capital expenditures, the decision on new projects and on an expansion programme and pricing.

    Historical Cost: Historical cost is an accounting method in which the assets of the firm are recorded in the books of accounts at the same value at which it was first purchased. Cost and historical cost usually mean the original cost at the time of a transaction. The historical cost method is the most widely used methods of accounting as it is easy for a firm to ascertain what price was paid for the asset.

  • Costs and Benefits in KMS

    Costs and Benefits in KMS

    What are Costs and Benefits in KMS?


    First, understand what is KMS (Knowledge Management Systems)? after Learn Costs and Benefits in KMS: KMS is a method for the improvement of business process performance. A knowledge management system is most often used in business in applications such as information systems, business administration, computer science, public policy and general management. Common company departments for knowledge management systems include human resources, business strategy, and information technology.

    Knowledge Management Systems (KMS) like any other information systems have its benefits as well as costs, weighing the benefits in the relationship with the costs will probably provide a basis for deciding whether to invest in it or not. What is Market-Based Management?

    Costs of KMS

    Although knowledge management system is beneficial and important to the organization, it also involves some cost. These costs vary quite a bit, depending on the size of the organization, the current level of infrastructure and the scope of knowledge management initiative. Also, the cost depends on whether or not there is an existing infrastructure.

    According to Marks, the first step in determining the return on invest­ment for a knowledge management project is to deter­mine the costs. On the surface, this may seem deceptively simple, but there are costs involved in a knowledge man­agement project that may not be readily obvious to the manager who is not experienced in estimating such proj­ects. Costs here include, but are not limited to the costs of hardware, software, and training. 

    1. Software: Obviously, the project will incur the cost of whatever software is chosen to be used. This can range from free, to nearly free, to several thousand dollars for an enterprise-wide knowledge management (KM) system. In addition, any technical infrastructure for the software that is need­ed will also have to be counted in the costs. The cost of software depends on whether the organization wants to use the bare-bones knowledge management systems, which may use e-mail, Web servers, corporate intranets, newsgroups, shared file sys­tems, or centralized databases and other software the company likely already has and uses, or can obtain for little or no cost. Or wishes to institute a level of knowledge integration and manage knowledge transfer which will involve investment in a commercially available product designed spe­cifically for the tasks that the company wishes to be able to accomplish with the knowledge management project.

    2. Hardware: This involves the costs of infrastructure that will be needed to support the system. There might also be the need for internet and network connections. Any upgrades to the com­pany’s network that will be needed in order to handle in­creased traffic attributable to the knowledge management system might also need to be considered. Using current systems and equipment will lead to heavier loads than in the past, and this will need to be considered too.

    3. Labour: It involves the cost that will need to be considered is the cost of employing a member of the IT staff to install the KM hardware and software on all needed servers and client machines as well as configuring the application to meet the need of the business. There will also be the need for maintenance. Knowledge will need to be input into the system in order for it to be useful, the costs for doing this might be heavy early on, but will steady out in the future, and will be based on the use of the system. The cost of training should also be considered as a labor cost due to the time sacrificed for it.

    Other, not so obvious costs that will be incurred include employee training, incentives to entice employees to use the KM system, and the labor costs of employees choosing to use the knowledge management system instead of working on other aspects of the job. Most of these labor costs will become benefits fairly readily, but they are an investment made by the company and must be counted in the costs of the knowledge management project in order to accurately measure or predict the cost of the project. 

    Implementation costs are usually moderate to acquire the hardware, develop internal software or license software from 3rdparty suppliers, and to train employees to utilize the system effectively.  However, the potential savings and increased efficiencies are enormous.  The payback period for most companies is estimated to be six months or less. The payback period will decrease as the size of the organization increases, and with the number of global locations that the company operates. McDonald and Shand ‘reported that a typical consultant-assisted knowledge management system costs between $1.5 million to develop’.

    Benefits of KMS

    Before any organization can invest their funds in anything, there must have been some expected or anticipated benefits or returns, there is need to highlight the benefits and cost of knowledge management systems. This system just like any other information systems is meant to add value to the organization, but knowledge management system, deal particularly with the intellectual asset of the organization. Although the major reason why most organizations invest in Knowledge Management Systems (KMS) is to gain competitive advantage, other derivable benefits are:

    1. Efficiency and Problem Solving: Knowledge management systems when done right will help in ensuring faster response time to key issues, make service delivery faster and also enhance problem-solving. This is because when best practices are well codified, stored, and made available, and when methods for problem-solving can be maintained, and made available instantaneously, employees won’t have to spend time looking for answers. Problem-solving will be eased as it will be possible to solve problems anytime and anywhere which will make the organization more productive, efficient and effective. Due to the nature of this organization, (consulting firm), the application of knowledge management systems will help in carrying out the needed services efficiently. For example, expert and dependable advice will be given to clients based on the availability of experiences and knowledge for comparison and justification.

    2. Better Decision Making: Knowledge management systems will help in making better decisions. When knowledge and experiences are pooled together, there is an avenue for critical considerations and judgment before decisions will be made. This is particularly important when there is need to compare and contrast before arriving at a decision or conclusion. The availability of needed idea, information and knowledge will help in making sure that the right decision is taken after the critical and intense examination which will also make the decision more concrete, justifiable and dependable. This will make this firm able to make necessary decisions on the needed improvements that will make our services more competitive and acceptable (preferable to a client). 

    3. Quality Service Delivery: One benefit that will be obtained will be the increased quality of services after using the KM systems. An employee who uses the knowledge manage­ment system may be able to obtain knowledge that will reduce the number of defective services that employees deliver or will increase the effectiveness and quality of the services being delivered. Higher quality services mean fewer dissatisfied clients, which mean fewer complaints from clients. Fewer complaints improve the company’s revenues and profit and are a benefit that can be attributed to a knowledge management system. If a company can notice a decrease in clients’ dissatisfaction since the knowledge management system was launched, at least a significant portion of this increase can be attributed to the KM system and marked as a benefit for it. This means that this organization will be able to come up with better and more competitive services due to the possibility of sharing valuable organizational information, knowledge, intelligence, and experiences among employees. This serves as a good way of avoiding or reducing redundancy and client satisfaction will be secured due to the improvements that will be introduced.

    4. Reduced Cost: Cost reduction is also a benefit that can be realized through the use of a knowledge management system. ‘Cost reduction represents approximately one-quarter of benefits from KM projects’. Besides la­bour costs, knowl­edge management systems may also yield savings in material costs. This can be as simple as savings on paper that were previously needed to disseminate memoranda that are now being replaced with entries in the knowledge management program, but the true benefit of cost reduc­tion through knowledge management is realized when employees discover and share methods for reducing costs on final products. Management will likely notice these savings but will need to speak with employees to understand that the source of the savings is indeed from the knowledge management system. This means that this organization will be able to reduce the cost of inviting or seeking professionals, due to the availability of needed knowledge and experiences.

    5. Speed and Service Delivery: Knowledge management systems help in compressing time and space for efficiency, reducing time wastage, which means the increase in workers’ productivity. Employees who use the knowledge management system will be able to work faster, because they will find information on the knowl­edge management environment that will allow them to avoid repeating the work of others, such as a snippet of computer code, or allow them to forgo extensive research that would ordinarily be needed to address a situation, or simply enlighten them to practices others have found that allow the job to be done more quickly. The only way to measure this labor cost savings will be through interviews with the employee. The employee’s estimate and confidence in it will be calculated as a benefit for the knowledge management system. This means that clients will be attended to as fast as possible, which will give the firm an advantage, especially by reducing delay.

    6. Reduced Training Time: An investment in these systems will help to reduce training time for new employees. Due to the availability of the needed knowledge and experiences, employees will be able to constantly apply them which will improve their ability. This training time for employees will be reduced as a result of the knowledge they are able to acquire. This means that employees are being trained indirectly through the application of knowledge management systems which reduces direct pieces of training. This will lead to a kind of strategic movement through well-coordinated efforts among peers. Thus the organisation will be able save time and money.

    7. Retention of Intellectual Properties: Knowledge management system helps in retaining intellectual properties after the employee leaves if such knowledge is codified. This is because when knowledge is codified, it is added to the organisation’s knowledge repository (a collection of internal and external knowledge), thus when knowledge is captured from an employee, such knowledge will remain even after he/she leaves. This means that it will be possible for the organisation to have a large knowledge base of several knowledge and experiences as a result of the historic knowledge contribution process. This will also help in building employees to become professionals as a result of the availability of previous experiences and knowledge for acquisition. 

    8. Increased Revenue and Development of New Business Ventures: Knowledge Management Systems helps in providing the personal capacity for revenue generation. It allows employees to work together and share ideas about certain plans especially in a global firm. Due to the cross-pollination of ideas among employees, there is a possibility that new business ventures will be developed and this will lead to an increase in revenue for the organisation. Due to the availability of ideas and experiences, this organisation will be able to manage the available knowledge for productivity and profitability.

    9. Sharing Business Resources over Long Distances: Through the use of knowledge management systems, the sharing of business resources is made possible. This is because when ideas and knowledge are pooled together, a knowledge-base is created from which each employee can access required information over long distances. If used effectively, these systems will be able to foster the company’s culture across geographic boundaries.  All employees will become part of an overall network, each with simple access to the intellectual capital of every member within the network. As a result employees will be able to perform better and jobs would be done faster. This is very important for a global consultation firm like this where relevant information is needed for service delivery. There will be no need to depend solely on the headquarters before needed information are gotten.

    Costs and Benefits in KMS