Cost Accounting

To satisfy the basic needs of life everyone wants to gain profit in the business which they are doing and for this right way of accounting is essential. Accounting can be classified into three categories:

  • Financial accounting.
  • Managerial accounting.
  • Cost accounting.

Meaning of cost accounting

Cost accounting is a branch which deals with the classification, recording and reporting of current as well as previous costs. By cost accounting management can make decisions of controlling the costs to improve the profitability in the business.

Following cost elements help in reducing company's costs and increase in their profitability:

Raw material:

By using cheap and high quality raw material the company's cost can be reduced and gain maximum profit.

Manual labor:

By reducing manual labor the company's cost can also be reduced.

Indirect expenses:

By not doing so much expenses the company can gain profit and the cost can also be reduced.

Cost accounting standards

Cost accounting standards means the measurement, assignment and allocation of costs to the government contracts. Various cost accounting standards are described below:

Consistency in estimating, accumulating, and reporting costs

  • The estimated costs for reimbursable orders should be the same as the cost accounting practices used in accumulating and reporting actual costs and vice-versa.

  • The estimated costs prepared for the reimbursable orders shall not be differ when actual costs are reported and accumulated during job performance.

Consistency in allocating costs incurred for the same purpose.

Allocation of home offices expenses to segments:

Headquarters expenses should be given on the basis of supporting and receiving activities. Mostly these expenses are given when the activities are directly reported to the office. The expenses which are not directly given are grouped in expense pools.

Expense pools:

The expense pools can be listed as follows:

  • Centralized services
  • Management of specific functions within activities.
  • Management of certain activities or group of activities.

Residual expenses:

Residual expenses are the expenses which are not directly given by expense pool and residual expenses the result of not identifying with specific activities or segments. Residual expenses expenses are given by means of base representative of the segments and the base is considered by the personnel of the organization and the capital invested in the organization.

Residual expenses given to any segments are based on the absence of the following things:

  • The percentage of the payroll dollars to the total payroll dollars of all the segments.
  • Direct labor dollars of the segment to the total direct labor dollars of all the segments.

  • Labor hours of the segment to the total labor dollars of all the segments.

Capitalization of tangible assets.

Accounting for unallowable costs:

Unallowable costs cannot be charged as reimbursable expense under any law.

Cost accounting period:

Cost accounting period is from October 1 to September 30 fiscal year.

Use of standard costs for direct material and direct labor.

Accounting for costs of compensated personal absence:

Compensated personal absence costs are always given directly to the employees for whom they are entitled.

Depreciation of tangible capital assets:

Depreciation of tangible capital assets costs can be charged as direct cost when they are used for the same purpose.

Allocation of business unit general and administrative expense to final cost objectives.

Accounting for acquisition cost of material:

The cost of material which provides the direct benefit will give to the cost objective otherwise it will give to the indirect cost pool.

Composition and measurement of pension cost:

As defense capital fund (DWCF) is not responsible for the pension cost so this standard should not be applied.

Adjustment and allocation of pension cost:

Adjustment and allocation of pension cost standard is also not applied.

Cost of money as an element of the cost of facilities capital.

Accounting for the cost of deferred compensation:

Accounting for the cost of deferred compensation is done when the future payment is measured with reasonable accuracy.

Accounting for insurance costs:

Instead of charging the customers when insurance loss occurs they charge on the causes responsible for that purpose.

Cost of money as an element of the cost of capital assets under construction:

Until the department of defense provides the loans for the construction the money used in the construction shall not be capitalized as its part.

Allocation of direct and indirect costs:

Pre-established rates can be used for direct and indirect costs.

Accounting for independent research and development costs and bid and proposal costs:

The expenditure done on all these costs in one accounting cost period shall not be the same in the other cost accounting period.

Cost accounting system

While designing the cost accounting system following objectives should be covered:

  • Measures of cost effectiveness should be provided within the activity and means of finding losses in performance of customers.

  • For the establishment of rate schedules and budget the cost data must be useful.

Secondly, cost accounting system should provide the following:

  • For cost control cost accounting system should provide the cost standards.

  • A reasonable basis for establishing cost estimates.

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