COSTING | AFM IMP TOPIC 2023
Costing has been newly added to the syllabus of accounting and financial management (AFM). This article will take you through some fundamentals of costing.
We are starting to provide gists for our already aired lectures that will help you go through that topic again and help in the retention of the concepts. The gists will be available in our everyday articles so do read them whenever you feel like revising. We will be covering Introduction to fundamentals of costing: An introduction to it, why is costing required in a business, what constitutes cost, what is costing, cost accounting and cost accountancy and how are these related to each other.
INTRODUCTION: FUNDAMENTALS OF COSTING
Why is costing required in a business?
Businesses run on the idea of profit earning. Companies tend to gain the maximum profit they could achieve but how do businesses manage to gain profit? Let’s find out.
Suppose a company has consumed Rs. 100 to manufacture a product. A company adds a margin amount to the cost consumed in the manufacturing of the product and sells the product at the margin-added price.
Cost to manufacture the product + Profit (Margin) = Selling price
Companies don’t get satisfied with the constant rate of profit they tend to attain to increase the profit but this process is not easy to conduct. They have to consider the competitiveness of the product. In order to increase the profit margin without affecting the selling price, the company tries to get the raw material at a lower price which means it will reduce the consumption of cost required in manufacturing the product.
Cost to manufacture the product + Profit (Margin) = Selling price (not affected for the consumers)
Cost is the sum that must be paid for the products and services received or the resources provided in exchange for those received.
Costing is a method or procedure for calculating cost. These methods are composed of the principles and regulations that regulate the process of determining the cost of goods and services.
Cost estimation is one of the goals of cost. In order to enhance cost precepts, it makes it easier for the administration to demonstrate the costs of the product, production unit, job, contract, and service.
Utilizing a variety of costing principles, including uniform costing, standard costing, and marginal costing, the cost may be demonstrated in a variety of circumstances.
A component of management accounting called cost accounting examines all costs across the supply chain to identify the true cost of producing a good or rendering a service. In order to prepare budgets and analyse profitability, it is done. Managers can utilize the data generated by this process to identify which services, departments, or products are most profitable and which ones require improvement.
Calculating fixed and variable costs is a part of cost accounting. Regardless of the level of production, fixed costs are expenses that are incurred on a monthly basis. Some examples are rent, depreciation, loan interest, and leasing costs. Supply, labour, and maintenance costs are examples of expenses that are referred to as variable costs because they alter when the amount of production changes. These expenses are linked to production in that the cost of the materials and labour used to make a product increases with the number of units produced.
It’s required in a business to examine, record, summarize and study the cost spent on any process or service or product etc.
Cost accountancy is the use of expense and cost accounting theories for better corporate control while taking into account how to determine profitability. Additionally, it entails the presentation of information gathered for managerial decision-making.
It includes principles, methods and techniques for costing and cost accounting. It’s a practice with which a cost accountant practices cost control and cost ascertainment.
So, we have discussed that in order to acquire what we have to pay is known as cost, costing is the method of obtaining information about the derivation of the cost. The data required to get the costing is provided by cost accounting. Costing and cost accounting has to be conducted under the rules and regulation specified in Cost accountancy.
Let’s practise a few questions based on what we understood.
- The price paid to acquire, accomplish, produce, or maintain anything is known as
d) None of the above
2. ………..refers to the techniques and processes of ascertaining costs.
a) Cost accountancy
b) Cost-accounting A
d) None of the above
- The basic objectives of cost accounting is
a) Tax compliance.
b) Financial audit.
c) Cost ascertainment.
d) Profit analysis.
- Cost accounting refers to the techniques and processes of ascertaining costs. This statement is true or false
a) This statement is true,
b) This statement is false,
Watch our video lecture on the newly introduced topic in the revised syllabus of JAIIB 2023 FUNDAMENTALS OF COSTING to get detailed answers. Here is the link to the video: https://youtu.be/k9ZXZv1JDyQ
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