Cost Accounting Concepts

Cost Accounting Concepts

A concept is a basic principle or assumption, as opposed to a procedure, for carrying out the concept. Cost accounting concepts may be separated into two groups:

  1. Planning

  2. Controlling

1. Planning: There are two key types of planning, as described below. Project Planning. The process whereby management, confronted by a specific problem, evaluates each alternative in order to arrive at a decision as to the course of future action. Since planning requires a comparison of the costs of various alternative solutions, the cost of each alternative must be determined.

Period Planning: The process whereby management systematically develops an acceptable set of plans for the total future activities of the enterprise, or some functional subdivision thereof, for a specified period of time. This type of planning, covering a period of one year or more, usually refers to an overall budget.

2. Controlling: This involves the systematic monitoring of performance to determine the degree of adherence to established objectives. Actual results are continuously measured against yardsticks such as budgets, standard costs, time study standards, etc. previously established for manufacturing, marketing, finance and all other activities of the company. Any significant deviation from such yardsticks can be detected quickly and management action taken promptly for correction.

The concepts of cost, expense, and loss are often used interchangeably.

The AICP A, in Accounting Terminology Bulletin No.4, defines these terms as follows:

Cost is “the amount, measured in money, of cash expended or other property transferred, capital stock issued, services performed, or a liability incurred, in consideration of goods or services received or to be received.”

Expense is “all expired costs which are deductible from revenues.” In a narrower sense “the term ‘expense’ refers to operating, selling, or administrative expenses, interest, and taxes.” Items included in cost of manufacturing, such as materials, labor, and overhead, should be described as costs, not expenses.

Loss is “(1) the excess of all expenses, in the broad sense of that word, over revenues for a period, or (2) the excess of all or the appropriate portion of the cost of assets over related proceeds, if any, when the items are sold, abandoned, or either wholly or partially destroyed by casualty or otherwise written off. When losses such as those described’
in (2) are deducted from revenues, they are expenses in the broad sense of that term.”

Activities of the Cost Department

The principal activities or tasks of cost accounting include:

  1. Providing data to aid management in making a choice among two or more alternatives.
  2. Preparing data to aid in the reduction or improvement of costs.
  3. Aiding in the creation and execution of budgets.
  4. Computing costs and profit for an accounting period.
  5. Developing inventory costs for inventory control and pricing.

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