Cost: Cost is the expenditure incurred on production of goods and services, either to be sold as finished products or used in the production of other goods and services.
Costing: It is the technique and process of ascertaining and calculating costs. It is the formal mechanism by means of which costs of product or services are controlled and ascertained.
Cost unit: A cost unit is a unit of quantity of product, service or time in relation to which cost may be ascertained, in other words the quantity upon which cost can be conveniently allocated.
Cost Center: Refers to any location, person or item for which costs may be ascertained separately and used for cost control. A cost center can broadly be divided as:
Production cost center
Service cost center
Production cost center: are those, which are actually engaged in making the product. Service cost centers: do not make the product but are essential aids to the productive centers. Like maintenance service, utilities etc.
[...] Though several different products are manufactured, the units in each product group will have common cost component or characteristics. Since unit costs are assumed to be substantially uniform, in Process costing costs are accumulated by department or "cost centers" and the cost of given department is divided by the total production of the department to obtain department unit cost. General Principals: 1. The production activities of the plant are classified into Production and Service cost centers Cost centers classify all direct or indirect cost of particular period Production in terms of physical [...]
[...] Overheads: Expenses as appearing under the head "Other expenses and provisions" in the financial accounts and which are not identifiable to any specific cost centre as well as expenses of certain departments for which separate cost statements are not prepared shall be treated as 'Overhead' and collected under Overhead cost centre. Classification of Overheads: According to nature: 1. Indirect material Indirect labor Indirect expenses. According to normality: 1. Normal overheads Abnormal overheads. According to controllability: 1. Controllable overheads Uncontrollable overheads. According to variability: 1. Fixed overheads Variable overheads Semi-variable overheads. METHODS OF COSTING 1. [...]
[...] Where production can be expressed in identical quantitative units and where manufacture is continuous, this type of costing is applied. Cost statements of cost –sheets are prepared under which the various items of expenses are classified and total expenditure is divided by total quantity produced in order to arrive at per unit cost of production. The method is suitable for flourmills, paper mills etc Departmental Costing: Ascertainment of the cost of output of each department separately is the objective of departmental costing. [...]
[...] However this system will not be useful if a vigorous system of controlling cost and keeping it up to standard cost is not in force. Standard costing is becoming more and more popular now- days. Advantages of Standard Costing: 1. Formulation of price and production policies Comparison and analysis of data Cost consciousness Better capacity to anticipate Delegation of authority and fixation of responsibility Management by “exception” Better economy, efficiency and productivity. Limitation of Standard Costing: 1. It is costly and may require high order of skill and competency In changing environment it is not suitable. [...]
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