Term Paper on Cost Accounting

Here is a compilation of term papers on ‘Cost Accounting’ for class 11 and 12. Find paragraphs, long and short term papers on ‘Cost Accounting’ especially written for school and college students.

Term Paper Contents:

Term Paper on the Introduction to Cost Accounting
Term Paper on the Meaning of Cost Accounting
Term Paper on Cost and Costing
Term Paper on the Scope of Cost Accounting
Term Paper on the Objectives of Cost Accounting
Term Paper on the Functions of Cost Accounting
Term Paper on the Advantages of Cost Accounting
Term Paper on the Disadvantages of Cost Accounting

Term Paper # 1. Introduction to Cost Accounting:

Industrialization and advent of factory system during the second half of 19th Century necessitating accurate cost information have led to the development of cost accounting. The growth of cost accounting was slow. To quote Eldons Handristen “Not until the last 20 years of the 19th Century was there much literature on the subject of cost accounting in England and even very little was found in the United States. Most of the literature until this time emphasized the procedure for the calculation of prime costs only”.

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Rapid development in cost accounting has taken place after 1914 with the growth of heavy industry and large scale production as a consequence of First World War when cost other than material and labour (overhead) constituted a significant portion of total cost.

The development of cost accounting in India is of recent origin and it is given importance after independence, when provision for Cost Audit under Sec.233 B of Companies Act was made. Vivian Bose Enquiry Committee revealed the malpractices of manufacturing companies.

It was felt that the financial audit falls short of expectations to reveal the malpractices. Therefore, under the Companies Act, the government was given the power to order for cost audit. This has given impetus to the development of cost accounting in India.

Term Paper # 2. Meaning of Cost Accounting:

It is the method of accounting for cost. The process of recording and accounting for all the elements of cost is called cost accounting. I.C.M.A. has defined cost accounting as follows: “The process of accounting for cost from the point at which expenditure is incurred or committed to the establishment of its ultimate relationship with cost centers and cost units. In its widest usage it embraces the preparation of statistical data, the application of cost control methods and the ascertainment of the profitability of activities carried out or planned”.

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Cost accountancy is an aid to management for decision making. I.C.M.A., has defined cost accountancy as follows: “The application of costing and cost accounting principles, methods and techniques to the science, art and practice of cost control and the ascertainment of profitability. It includes the presentation of information derived there from for the purpose of managerial decision making”.

Term Paper # 3. Cost and Costing:

The term ‘cost’ has to be studied in relation to its purpose and conditions. As per the definition by Institute of Cost and Management Accountants (I.C.M.A.), now known as Chartered Institute of Management Accountants (C.I.M.A.), London ‘cost’ is the amount of: actual expenditure incurred on a given thing.

The I.C.M.A., London has defined costing as the ascertainment of costs. “It refers to the techniques and processes of ascertaining costs and studies the principles and rules concerning the determination of cost of products and services”.

Concept of Cost:

A cost accountant is mainly concerned with the following cost concepts, concept of objectivity, concept of materiality, concept of time span, concept of relevant range of activity, concept of relevant cost and benefit.

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Cost Unit:

A cost unit refers to a unit of product, service or time in relation to which costs may be ascertained or expressed. In other words, cost unit is the unit of output for which cost is ascertained. For examples, the cost of air-conditioner is ascertained per unit.

The selection of cost unit is important in cost accounting. It should be carefully selected to suit the nature of business operation. The selected unit should be neither too small nor too big, but ideal for cost ascertainment. Cost unit may be expressed in terms of number (units), weight, area, length etc.

The following are the cost units in various industries:

Thus, cost units may vary from industry to industry. An enterprise which produces more than one type of product may have more than one cost unit.

Cost Centre:

A large business is divided into a number of functional departments (such as production, marketing and finance) for administrative convenience. These departments are further divided into smaller divisions for cost ascertainment and control. These smaller divisions are called cost centers.

A cost centre is a location, person or item of equipment (or group of these) in relation to which cost can be ascertained and controlled. In simple words, it is a sub-division of the organization to which cost can be charged.

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A cost centre can be:

(a) A location i.e. an area such as works department, store yard

(b) A person such as supervisor, sales man

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The determination of suitable cost centre is very important for the purpose of cost ascertainment and control. The manager of a cost centre is held responsible for control of cost of his cost centre. The number and size of cost centers vary from organization to organization.

The selection of a suitable cost centre depends on the following factors:

(a) Nature and size of the business.

(b) Layout and organization of the factory.

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(d) Management policy regarding cost ascertainment and control.

Types of Cost Centres:

Cost centres may be of the following types:

(a) Production Cost Centre:

A cost centre is which production is carried on is known as production cost centre, e.g., machine shop, welding shop, assembly shop, etc.

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(b) Service Cost Centre:

A cost centre which renders service to production cost centre is known as service centre e.g. power house, stores department, maintenance department etc.

(c) Personal Cost Centre:

It consists of a person or a group of persons e.g. Sales manager, Works manager etc.

(d) Impersonal Cost Centre:

It consists of a location or a machine or a group of machines, e.g. canteen.

(e) Operation Cost Centre:

It consists of machines and/or persons carrying out similar operations, e.g. machines and operators engaged in welding or turning.

Profit Centre:

A profit centre is a responsibility centre which accumulates revenues as well as costs. In other words, it is a department or segment of the organization which has been assigned control over both revenues and cost. For instance, if there are two divisions in a textile company, say readymade and clothing, each one may be regarded as a profit centre.

Distinguish between Cost Centre and Profit Centre:

Important differences between cost centre and profit centre are:

(i) Cost centre is created by the cost accountant. On the other hand, a profit centre is created by the top management.

(ii) Cost centre is created for the purpose of cot ascertainment and control. But the profit centre is created for the purpose of evaluation of performance.

(iii) Cost centre is a small segment, whereas profit centre is a large segment.

(iv) Cost centres do not enjoy autonomy. But, profit centres enjoy autonomy.

(v) Cost centre does not have a target of costs. But a profit centre has a target of profit for performance evaluation.

Cost Control:

Cost control can be defined as the comparative analysis of actual costs with appropriate standards of budgets to facilitate performance evaluation and formulation of corrective measures. It aims at accomplishing conformity between actual result and standards or budgets. Cost control is keeping expenditures within prescribed limits.

Cost control has the following features:

(i) Creation of responsibility centres with defined authority and responsibility for cost incurrence.

(ii) Formulation of standards and budgets that incorporate objectives and goals to be achieved.

(iii) Timely cost control reports (responsibility reporting) describing the variances between budgets and standards and actual performance.

(iv) Formulation of corrective measures to eliminate and reduce unfavourable variances.

(v) A systematic and fair plan or motivation to encourage workers to accomplish budgetary goals.

(vi) Follow-up to ensure that corrective measures are being effectively applied.

Cost control does not necessarily mean reducing the cost but its aim is to have the maximum utility of the cost incurred. In other words, the objective of cost control is the performance of the same job at a lower cost or a better performance for the same cost.

Cost Reduction:

Cost reduction may be defined as an attempt to bring costs down. Cost reduction implies real and permanent reduction in the unit cost of goods manufactured or services rendered without impairing their (product or goods) suitability for the use intended.

The goal of cost reduction is achieved in two ways:

(i) By reducing the cost per unit and

(ii) By increasing productivity.

The steps for cost reduction include elimination of waste, improving operations, increasing productivity, search for cheaper materials, improved standards of quality, finding other means to reduce unit costs.

Cost reduction has to be achieved using internal factors within the organisation. Reduction of costs due to external factors such as reduction in taxes, government subsidies, grants etc. do not come under the concept of cost reduction.

Term Paper # 4. Scope of Cost Accounting:

The term scope here refers to field of activity. Cost accounting is concerned with ascertainment and control of costs. The information provided to the management is helpful for cost control and cost reduction through functions of planning, decision making and control.

In the initial stages of evolution, cost accounting confined itself to cost ascertainment and presentation of the same with the main objective of finding the product cost. With the development of business activity and introduction of large scale production, the scope of cost accounting was broadened and providing information for cost control and cost reduction has assumed equal significance along with finding out cost of production.

In addition to enlargement of scope, the area of application of cost accounting has also widened. Initially cost accounting was applied in manufacturing activities only. Now, it is applied in service organizations, government organizations, local authorities, farms, extractive industries, etc.

Term Paper # 5. Objectives of Cost Accounting:

The following are the main objectives of cost accounting:

(i) Ascertainment of Cost:

It enables the management to ascertain the cost of product, job, contract, service or unit of production so as to develop cost standard. Costs may be ascertained, under different circumstances, using one or more types of costing principles-standard costing, marginal costing, uniform costing etc.

(ii) Fixation of Selling Price:

Cost data are useful in the determination of selling price or quotations. Apart from cost ascertainment, the cost accountant analyses the total cost into fixed and variable costs. This will help the management to fix the selling price; sometimes, below the total cost but above the variable cost. This will increase the volume of sales-more sales than previously, thus leading to maximum profit.

(iii) Cost Control:

The object is to minimize the cost of manufacturing. Comparison of actual cost with standards reveals the discrepancies- variances. It the variances are adverse, the management enters into investigation so as to adopt corrective action immediately.

(iv) Matching Cost with Revenue:

The determination of profitability of each product, process, department etc. is the important object of costing.

(v) Special Cost Studies and Investigations:

It undertakes special cost studies and investigations and these are the basis for the management in decision-making or policies. This will also include pricing of new products, contraction or expansion programmes, closing down or continuing a department, product mix, price reduction in depression etc.

(vi) Preparation of Financial Statements, Profit and Loss Account, Balance Sheet:

To prepare these statements, the value of stock, work-in-progress, finished goods etc., are essential; in the absence of the costing department, when we have to close the accounts it rather takes too much time. But a good system of costing facilitates the preparation of the statements, as the figures are easily available; they can be prepared monthly or even weekly.

Term Paper # 6. Functions of Cost Accounting:

According to Blocker and Weltemer, “Cost Accounting is to serve management in the execution of polices and in comparison of actual and estimated results in order that the value of each policy may be appraised and changed to meet the future conditions”.

The main functions of cost accounting are:

(i) To serve as a guide to price fixing of products.

(ii) To disclose sources of wastage in process of production.

(iii) To reveal sources of economy in production process.

(iv) To provide for an effective system of stores, materials etc.

(v) To exercise effective control on factors of production.

(vi) To ascertain the profitability of each product.

(vii) To suggest management of future expansion policies.

(viii) To present and interpret data for management decisions.

(ix) To organize cost reduction programmes.

(x) To facilitate planning and control of business activity.

(xi) To supply timely information for various decisions.

(xii) To organize the internal audit systems etc.

Term Paper # 7. Advantages of Cost Accounting:

The following are the advantages of cost accounting – Cost accounting as an aid to management, advantage to employee, advantage to creditors, investors and bankers, advantages to the Government and the society. The importance of costing to management is as follows, Profitable and unprofitable activities are disclosed, enables a concern to measure the efficiency, provides information upon estimates and tenders, guides future policies, helps in increasing profits, periodical determination of profits or losses, furnishes reliable data, detect exact cause or decrease or Increase.

(i) Helps in Decision Making:

Cost accounting helps in decision making. It provides vital information necessary for decision making.

For instance, cost accounting helps in deciding:

(a) Whether to make a product buy a product?

(b) Whether to accept or reject an export order?

(ii) Helps in Fixing Prices:

Cost accounting helps in fixing prices. It provides detailed cost data of each product (both on the aggregate and unit basis) which enables fixation of selling price. Cost accounting provides basis information for the preparation of tenders, estimates and quotations.

(iii) Formulation of Future Plans:

Cost accounting is not a post-mortem examination. It is a system of foresight. On the basis of past experience, it helps in the formulation of definite future plans in quantitive terms. Budgets are prepared and they give direction to the enterprise.

(iv) Avoidance of Wastage:

Cost accounting reveals the sources of losses or inefficiencies such as spoilage, leakage, pilferage, inadequate utilization of plant etc. By appropriate control measures, these wastages can be avoided or minimized.

(v) Highlights Causes:

The exact cause of an increase or decrease in profit or loss can be found with the aid of cost accounting. For instance, it is possible for the management to know whether the profits have decreased due to an increase in labour cost or material cost or both.

(vi) Reward to Efficiency:

Cost accounting introduces bonus plans and incentive wage systems to suit the needs of the organization. These plans and systems reward efficient workers and improve productivity as well improve the morale of the work-force.

(vii) Prevention of Frauds:

Cost accounting envisages sound systems of inventory control, budgetary control and standard costing. Scope for manipulation and fraud is minimized.

(viii) Improvement in Profitability:

Cost accounting reveals unprofitable products and activities. Management can drop those products and eliminate unprofitable activities. The resources released from unprofitable products can be used to improve the profitability of the business.

(ix) Preparation of Final Accounts:

Cost accounting provides for perpetual inventory system. It helps in the preparation of interim profit and loss account and balance sheet without physical stock verification.

(x) Facilitates Control:

Cost accounting includes effective tools such as inventory control, budgetary control and variance analysis. By adopting them, the management can notice the deviation from the plans. Remedial action can be taken quickly.

Term Paper # 8. Disadvantages of Cost Accounting:

Cost accounting has become indispensable tool to management for exercising effective decisions.

However, the following are the usual disadvantages raised against cost accounting:

(i) Cost Accounting is Costly to Operate:

One of the objections against cost accounting is that it involves heavy expenditure to operate. No doubt, expenses are involved in introduction and operation of cost accounting system. This is the case with any accounting system; the benefits derived by operating the system are more than the cost. Therefore an organization need not hesitate to install and operate the system.

(ii) Cost Accounting is Unnecessary:

It is felt by a few that cost accounting is of recent origin and an enterprise can survive without cost accounting. No doubt financial accounting may be helpful to draw P & L Account and Balance Sheet but an enterprise can work efficiently with the help of cost accounting and it is necessary to increase efficiency and profitability in the long run.

(iii) Cost Accounting Involves many Forms and Statements:

It is pointed against cost accounting that it involves usage of many forms and statements which leads to monotony in filling up of forms and increase of paper work. It is true that cost accounting is operated by introducing many forms and preparation of statements. This will become routine and as time passes the utility of forms is realized and the forms can be reviewed, revised, simplified and minimized.

(iv) Costing may not be Applicable in all Types of Industries:

Existing methods of cost accounting may not be applicable in all types of industries. Cost accounting methods can be devised for all types of industries, and services.

It is based on estimations:

Some people claim that costing system relies on predetermined data and therefore it is not reliable. Costing system estimates costs scientifically based on past and present situations and with suitable modifications for the future. This leads to accurate cost figures based on which management can initiate decisions. But for the predetermined costs, cost accounting also becomes another ‘Historical Accounting’.

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