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INTRODUCTION OF COST ACCOUNTING

1.1 Introduction To Nature And Scope Of Cost Accounting

1.2. Need For Cost Accounting 1.3 Growth And Development Of Cost Accounting 1.4 Definition And Scope Of Cost Accountancy 1.5 Nature Of Cost Accounting 1.6 Role Of Cost Accounting 1.7 Price Determination Of A Products

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INTRODUCTION OF COST ACCOUNTING

1.1

INTRODUCTION

TO

NATURE

AND

SCOPE

OF

COST

ACCOUNTING:
In the modern business world, the nature and functioning of business organisations have become very complicated. They have to serve the needs of variety of parties who are interested in the functioning of the business. These parties constitute the owners, creditors, employees, government agencies, tax authorities, prospective investors, and last but not the least the management of the business. The business has to serve the needs of these different category of people by way of supplying various information from time to time. In order to satisfy the needs of all these group of people a sound organisation of accounting system is very essential. In the ancient days the information required by those who were interested with a business organisation was met by practising a system of accounting known as financial accounting system. Financial accounting is mainly concerned with preparation of two important statements, viz., income statement (or profit & loss account) and positional statement (or Balance Sheet). This information served the needs of all those who are not directly associated with management of business. Thus financial accounts are concerned with external reporting as it provides information to external authorities. But management of every business organisation is interested to know much more than the usual information supplied to outsiders. In order to carry out its functions of planning, decision-making and control, it requires additional cost data. The financial accounts to some extent fails to provide required cost data to management and hence a new system of accounting which could provide internal report to management was conceived of.

1.2NEED FOR COST ACCOUNTING:

The need for cost accounting arises owing to the following : To Overcome the Limitations of Financial Accounts

Financial accounting records in an overall manner the results of the operations of a business, using conventional double entry book-keeping techniques. It suffers from the following limitations :
(i)

It provides only past data : Financial accounts provide out of date information to management. But management is interested in current data but not past data as it does not serve any purpose to it. Therefore it has been rightly pointed out that financial accounts provide only a post-mortem analysis of past activities.

(ii) It

reveals only over all result of the business : Financial accounts does not provide data for each and every product, process, department or operation separately. Instead it provides the financial information in a summary form for the entire organisation as a whole.

(iii)

It is static in nature : Modern business is dynamic but not static. Financial accounts does not incorporate the changes that take place within the business.

(iv)

It fails to take into account the impact of price level change : In the modern inflationary conditions the price level has significant impact over financial statement. Under financial accounts, assets are shown at the actual or historical cost. Consequently depreciation is also charged on actual or historical cost. This under charging of depreciation will distort the profit figure.

(v) Possibility

of manipulation of financial accounts : Very often financial accounts are

manipulated at the whims and fancies of management so as to project better image in the minds of prospective investors. The chief forms of manipulating the financial accounts assume the form of over or undervaluation of inventory, excessive or inadequate provision for depreciation, creation of secret reserves, etc.

(vi)

It fails to exercise control over resources : Financial accounts fail to exercise control over materials, labour and other expenses incurred in a business enterprise. As a results, avoidable wastages and losses go unchecked under this system of accounts.

(vii)

It fails to provide adequate data for price fixation : Financial accounts fail to provide adequate cost data on the basis of which selling price is fixed. In the absence of fixation of prices in advance, it is not possible to supply quotations to the prospective customers. To that extent the income from such sales diminish.

(viii)

It fails to provide adequate data for management in carrying out its functions : Management of every organisation relies heavily on adequate cost data for formulating policies and in decision-making process. But financial accounts fails to provide such useful cost data to management.

(ix)

It does not provide a basis for cost comparison : Financial accounts does not help in cost comparison over a period of time or between two jobs or two operations. Thus a basis for judging the efficiency of an year with past year or worthfulness of two different jobs or operations cannot be appraised.

(x) It

does not make use of control techniques : Financial accounts fail to make use of certain important cost control techniques such as budgetary control and standard costing. Thus financial accounts do not facilitate measuring the efficiency of the business with the help of control techniques.

(xi)

It fails to ascertain break-even point : Financial accounting does not help in ascertaining the break-even point, i.e., the sale or output where the revenue equals the cost. Hence, the point of no-profit-no-loss cannot be made out under financial accounts.

To Ensure Optimum Utilisation of Resources

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In todays business world, the resources available are very scarce. Hence every business unit must strive hard to obtain maximum output with the available input. In order to ensure the optimum utilisation of scarce resources, the value of input is measured against the value of output. This implies matching cost per unit of production against the value of output or selling price. But financial accounts does not provide the information relating to cost per unit of production. Hence the need for cost accounting was felt necessary. To Achieve Overall Efficiency of Business Every businessman will make constant effort to improve his business. In order to formulate suitable policy and sound decision, he has to know answers to certain questions such as (a) What is the maximum profit which a business can make? (b) Is the profit earned by it is more or less compared to the earlier years? (c) Which product line is making more profit? (d) Has too much capital is blocked in raw materials? (e) Whether the cost of production has gone up compared to earlier years? (f) Should the selling price requires revision? Cost accounting serves as an useful tool in the hands of management in this direction. By analysing the cost of production of every unit, it helps management to know the answers to the above questions.

1.3

GROWTH AND DEVELOPMENT OF COST ACCOUNTING:

The history of cost accounting can be traced back to the fourteenth century. In the course of its evolution it passed through following stages. (1) In the first stage of its development, cost accounting was concerned only with the three prime cost elements, viz., direct material cost, direct labour cost and direct expenses. For recording the transactions relating to materials the important documents used were (a) stores ledger, (b) a material requisition note, and (c) materials received note. To account for labour cost, employee time card and labour cost card were devised by Mr. Metcalfe. Later on a distinction between manufacturing and non-manufacturing cost was made by Mr. Norton. Thus material cost, labour cost and manufacturing cost constituted prime cost. (2) Secondly, around the turn of the nineteenth century, the importance of nonmanufacturing cost (overheads) was recognised as one of the distinct element of cost. The method of charging non-manufacturing cost to the production cost was devised under this stage.
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(3) Thirdly, the techniques of estimation and standards are devised. Instead of using actual cost, standard costs are used and by comparing with the actual cost the differences are noted, analysed and disposed off accordingly. This helps in knowing the efficiency of the business undertaking. (4) Fourthly, cost accounting methods were applied to all types of business undertakings. The costing principles and techniques were also extended to important functions of a business. (5) In modern times the development of electronic data processing has occupied significant stage in the growth of cost accounting system. Cost Accounting in Indian Context The application of cost accounting methods in Indian industries was felt from the beginning of the twentieth century. The following factors have accelerated the system of cost accounting in our country. (a) Increased awareness of cost consciousness by Indian industrialists with a view to ascertain costs more accurately for each product or job. (b) Growing competition among manufacturers led to fixation of prices at a lower level so as to attract more customers. (c) Economic policy of government which laid emphasis on planned economy with a view to achieve the targets led to cost reduction programmes by Indian industrialists. (d) Increased government control over pricing led the Indian manufacturers to give utmost importance to the installation of cost accounts. (e) The establishment of National Productivity Council in 1958 and the Statutory Recognition of Institute of Cost and Works Accountants of India in 1959 gave further encouragement to install cost accounting system in Indian industries.

1.4 DEFINITION AND SCOPE OF COST ACCOUNTANCY: Definitions

The terminology of cost accountancy published by the Institute of Cost and Management Accountants, London defines cost accountancy as the application of costing
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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 therefrom for the managerial decision-making.

On analysis of the above definition, the following features of cost accountancy become evident : (a) Cost accountancy is used in the broadest sense when compared to cost accounting and costing. This is so because cost accountancy is concerned with the formulation of principles, methods and techniques to be applied for ascertaining cost and profit. (b) Having ascertained cost and profit, cost accountancy is concerned with presentation of information to management. To enable management to carry out its functions, reports must be promptly made available at the right time, to the right person and in a proper from. (c) The information so provided is to serve the purpose of managerial decision making such as introducing a new line of product, replacement of manual labour by machines, make or buy, decisions, etc.

Scope of Cost Accountancy

The scope of any subject refers to the various areas of study included in that subject. As regards the scope of cost accountancy is concerned, it has vast scope. The following topics fall under the purview of cost accountancy : (1) Costing, (2) Cost Accounting, (3) Cost Control Techniques, (4) Budgeting and (5) Cost Audit.

1. Costing

The terminology of ICMA, London, defines costing as the technique and process of ascertaining the cost. The above definition is very significant in as much as it carries the main theme of cost accountancy. This definition emphasises two important aspects, viz. (a) The Technique And Process Of Costing : The technique of costing involves two distinct steps, namely, (i) collection and classification of costs according to various elements and (ii) allocation and apportionment of the expenses which cannot be directly charged to production. As a process, costing is concerned with the routine ascertainment of cost with a formal procedure. (b) Ascertainment Of Cost : It involves three steps, viz., (i) collection and analysis of expenses, (ii) measurement of production at different stages and (iii) linking up of production with the expenses. To achieve the first step, costing has developed different systems such as Historical, Estimated and Standard Cost. For achieving the second step, costing has developed different methods such as single or output costing. Job costing, contract costing, etc. Finally, for achieving the last step costing has developed important techniques such as Absorption Costing, The three terms indicated as systems, methods, techniques are independent factors but co-exist together. Ascertainment of cost of production is based on all these three terms. For example, continuous type of industries may use process costing as a method, using actual cost as a system, under Standard Costing Technique.

2. Cost Accounting
Kohler in his dictionary for Accountants defines cost accounting as that branch of accounting dealing with the classification, recording, allocation, summarisation and reporting of current and prospective costs. Mr. Wheldon defines cost accounting as the classifying, recording and appropriate allocation of expenditure for the determination of the costs of products or services, the relation of these costs to sales values, and the ascertainment of profitability. The above definitions reveal the following aspects of cost accounting : (a) Cost classification : This refers to grouping of like items of cost into a common group.

(b) Cost recording : This refers to posting of cost transactions into the various ledger maintained under cost accounting system. (c) Cost allocation : This refers to allotment of costs to various products or departments. (d) Cost determination or cost finding : This refers to the determination of the cost of goods or services by informal procedure, i.e., procedures that do not carry on the regular process of cost accounting on a continuous basis. (e) Cost reporting : This refers to furnishing of cost data on a regular basis so as to meet the requirements of management.

3. Cost Control
According to Kohler, cost control represents the employment of management devices in the performance of any necessary operation so that pre-established objectives of quality, quantity and time may be attained at the lowest possible outlay for goods and services. The terminology published by ICMA, London, defines cost control as The guidance and regulation by executive action of the cost of operating an undertaking. Acccording to this definition, cost control aims at guiding the actuals towards the lines of target and regulates the actuals if they deviate from the targets. This guidance and regulation is done by the executive who is responsible for causing the deviation. This process will become clear by enumerating the steps involved in any cost control technique. (a) Fixation of targets in terms of cost and production performance. (b) Ascertaining the actual cost and production performance. (c) Comparison of actuals with the targets. (d) Analysing the variance by causes and the person responsible for it. (e) Taking remedial steps to set right unfavourable variations. Cost control is exercised through a variety of techniques such as inventory control, quality control, budgetary control, standard costing, etc. The advantages of cost control are as follows : (a) It helps in utilising the resources to the full extent. (b) It helps in reduction of prices which are benefited by customers. (c) It helps in competing successfully in the market.

(d) It increases the profit earning capacity of the business. (e) It increases the goodwill of the business.

4. Budgeting
Mr. Heiser in his book BudgetingPrinciples and Practice, defines budget as an overall blue print of a comprehensive plan of operations and actions expressed in financial terms. According to him hudgeting process involves the preparation of a budget and its fullest use not only as a devise for planning and co-ordinating but also for control.

5. Cost Audit
The terminology of ICMA, London, defines cost audit, as the verification of the correctness of cost accounts and of the adherence to the cost accounting plan.

1.5

NATURE OF COST ACCOUNTING:

The nature of cost accounting can be brought out under the following headings :

1. Cost accounting is a branch of knowledge : Though considered as a branch of

financial accounts, cost accounting is one of the important branch of knowledge, i.e., a discipline by itself. It is an organised body of knowledge consisting of its own principles, concepts and conventions. These principles and rules of course vary from industry to industry.

2. Cost accounting is a science : Cost accounting is a science as it is a body of systematic

knowledge relating to not only cost accounting but relating to a wide variety of subjects such as law, office practice and procedure, data processing, production and material control, etc. It is necessary for a cost accountant to have intimate knowledge of all these field of study in order to carry on his day-to-day activities. But it is to be admitted that it is not a perfect science as in the case of natural science.

3. Cost accounting is an art : Cost accounting is an art in the sense it requires the ability
and skill on the part of cost accountant in applying the principles, methods and techniques of cost accountancy to various management problems. These problems include the ascertainment of cost, control of costs, ascertainment of profitability, etc.
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4. Cost accounting is a profession : In recent years cost accounting has become one of
the important professions which has become more challenging. This view is evident from two facts. First, the setting up of various professional bodies such as National Association of Accountants (NAA) in USA. The Institute of Cost and Management Accountants in UK, the Institute of Cost and Works Accountants in India and such other professional bodies both in developed and developing countries have increased the growing awareness of costing profession among the people. Secondly, a large number of students have enrolled in these institutes to obtain costing degrees and memberships for earning their livelihood.

1.6 ROLE OF COST ACCOUNTING:

In a manufacturing concern accounting activities are usually divided into two parts: financial accounting and cost accounting. Financial accounting deals with the business as a whole, and at the end of a designated accounting period it produces information about the current financial status of the business, as well as the amount of profit or loss incurred during the period in question. Balance sheets and profit and loss statements do not reveal how profitable one product is versus another, or whether one plant produces more efficiently than another. Although the stockholder or investment analyst may care little about details of efficiency and cost since to them the overall profit of the business is sufficient, management must take a different point of view. Naturally, management is interested in maintaining the overall position of the company. The overall position of a company can include such measures as how successfully it competes, how it is perceived by its customers, competitors, and investors, and its capacity for future growth. In cost accounting the total expenditures in operating a business are broken down on per item or per unit basis, as for example the cost of producing a gallon of gasoline, a ton of coal, a dozen shirts, or a refrigerator. The same idea can be extended to cost per production order, as when a special product is made for a customer, or extended to cost per activity or operation, such as the cost of drilling inch holes, or plating sheet metal of a certain size and quality.

Cost accounting provides information for the following purposes:

1. Cost determination

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The costs and expense of a business are recorded, classified, and allocated to various jobs, departments, products, or services. 2. Costs for pricing Once costs are determined, the information also serves as a guide regarding prices to be quoted to customers. Even though selling prices are governed only partly by the costs of production, in the long run the selling price must atleast equal the costs of production, or there will be serious consequence to the profit and loss statement. 3. Cost for managerial decision In a sense, both cost determination and cost for pricing provide bases for managerial decisions. Although managerial decision making actually becomes much more complex than the statement above implies, cost information may be helpful in making decision that have to do with (a) Whether to add a new product, or to drop one that is now being produced (b) Whether to manufacture a certain unit, or buy it on the outside, and (c) Whether to add certain sales terrories and drop others. 4. Cost control One of the more essential purposes of cost accounting is control of expenditures. Such control leads to efficiency in the use of labor, materials machines and plants. Although to a large extent selling prices are determined by competition, the profit-making capacity of a business is guided by the efficiency with which costs are controlled.

1.7 PRICE DETERMINATION OF A PRODUCT:

Accuracy in product costing is an important issue in managerial accounting and control. For purposes of product profitability analysis and continuous cost improvement, it is no longer considered sufficient to obtain aggregate cost figures only that are used for external financial reporting. With increasing global competition in the marketplace, the trend is towards setting a target selling price with a target product quality as a first step in new product planning. This is very different from the traditional approach where the selling price is set by estimating the product cost and adding to it a desired profit margin and where an acceptable level of quality is the aim. The new trend is to attain the highest product quality or
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at least to meet the target quality level at the target price. Thus, if the estimated product cost is below the target cost obtained by deducting a profit margin from the target price, the task is to increase quality further rather than to accept a higher profit margin. If the estimated product cost is higher than the target cost, then alternative product designs are sought or the profit margin reduced, rather than increasing the target selling price or reducing target quality. This is the currently proven way to obtain a desirable market share for the product. As a consequence, it is more important than ever to accurately determine product costs. One of the major components of product cost, which affects the accuracy of its estimation, involves the application of overheads. This issue has led to the development of activity-based costing approaches. However, a theoretically sound application of overhead should be based on the opportunity cost of producing the product, including its consumption of common resources.

Opportunity Cost as Transfer Price

A transfer price is set for the service rendered by one organizational unit to another within the firm. The purposes of charging a transfer price are to accurately measure the full cost of the product and to induce the various organizational units to act in the best interest of the firm. There are two reasons for a transfer price to have an incentive role in a firm: (1) goal incongruence among the organizational unit managers and the firm manager, and (2) information asymmetries among the units. The measurement of product cost and the incentive issues are generally not tackled together in the literature on agency modeling. Multi-period considerations can mitigate the incentive issue but not the measurement problem. The approach proposed here addresses both the measurement and incentive issues (i.e., the extent of utilization of the common service center by decentralized units). A theoretically sound definition for the transfer price when one unit provides a service to another unit within a firm is to set it equal to the incremental costs plus opportunity costs. The incremental costs are usually taken to be the incremental variable costs of providing the service, but may include incremental fixed costs as well. In theory, opportunity costs are zero if there is excess capacity in the service center unit. If the servicing unit is operating at full capacity, the opportunity cost is calculated so that the total transfer price is equal to the market price of the product being transferred. In the case of a service, such as machinery repair, the market price is the price the outsiders will charge for this service. Thus, the

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opportunity cost apparently takes on only two extreme values. With the introduction of demand and scheduling uncertainty, however, this analysis is no longer appropriate.

Job Opportunity Cost in a Common Service Center

Consider a common service center that provides service to several jobs. The jobs may originate from many organizational units. Service rendered may be the repair of machinery, computer consultancy, or even a production process whose facility is shared by several jobs. The capacity of the service center is limited. If a specific job requires service when the center is occupied serving other jobs, it will have to wait in a queue for its turn. Viewing it in reverse fashion, if a job seeks to utilize a common service center, it creates a delay for jobs that may arrive later. The uncertainty involved in the actual arrival times precludes one from stating the exact delay caused by any specific job on the other jobs. Nevertheless, one can work with expected delays instead, provided one can determine the rate of demand by jobs for the service and the capacity of the service center. Formulas from queuing theory may be used to determine the expected delay experienced by jobs at the service center. The cost due to delay experienced by the jobs is the opportunity cost of serving any other job. If this job is not processed, the delay and hence potential cost will not be experienced by the other jobs. Equivalently, this is the cost of consuming part of the common service center resource by the job. The cost incurred to set up a service center is a sunk cost and should not directly enter into the determination of product cost needed for managerial decision-making. What should be part of the product cost is the opportunity cost of using the service. This idea is problematic if one assumes no uncertainty with respect to demand and service times. The problem arises because (1) Either there is excess capacity in the service center, in which case the opportunity cost is zero, or (2) The service center is operating at full capacity, in which case the opportunity cost is at its maximum equal to the market price less incremental variable costs. Taking into account the uncertainties with respect to demand and service times implies that capacity cannot be fully utilized (i.e., there must be times during which the center is idle), otherwise the queue length will become infinitely long (for a proof of this statement, see a standard book on queuing theory). It does not follow, however, that the opportunity cost is
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zero. Even though there is excess capacity, many jobs may be delayed prior to obtaining service due to the uncertain nature of demands and service times. Any job that seeks to use the center will, on average, cause a delay for other jobs that may arrive. In order to provide concrete expressions for this idea, let us suppose that the cost of delaying a job by one unit of time is H and the expected delay experienced at the center by any job demanding service is D, so that the expected cost due to delay for one job is HD. If the demand rate is A per period, then the expected total cost due to delay per period for all the jobs using the service center is AHD. If we consider a single job, the delay experienced by all the jobs in the service center by the entrance of this specific job is the marginal value of the total expected delay cost per period, which is equal to [HD+{AH}.dD/dA] (where the symbol dD/dA denotes the derivative of D with respect to A). The first component is the delay cost for the entering job itself and the second component is the opportunity cost of serving the job, namely, the delay imposed on the other jobs. For given probability characterizations of the demand and service processes, formulas for D are available from queuing theory. For example, if the demand process has a Poisson distribution and the service process has an exponential distribution with expected service time, S, the expected delay is given by the formula, D = S/(l SA). The opportunity cost is equal to SAH/(1-SA). This is the amount to be applied to the job for utilizing the service in addition to all the variable costs of providing the service. This applied cost ranges from zero to a maximum equal to the market price for the service less variable service costs.

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2
REVIEW OF LITERATURE

2.1 Introduction 2.2 View Of Cost Accounting Experts

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2
REVIEW OF LITERATURE

2.1 INTRODUCTION:
The complexity of economic life in conditions of competition imposed by the market economy and globalization also increases the role of information in decision making. Its quality affect both the quality of current decisions and the prospect of taking decisions and hence the results of decision. The objective of each activity is to increase the efficiency of the basic system, which is why managers need concrete and timely information for decision-making within an entity. From here arises the need to improve management accounting. Accounting information for users fall into one of the categories: public information and / or confidential information. In countries with a developed market economy the management system of an entity is composed of an information system consisting of applications, concepts and techniques characteristic.

2.2 VIEW OF COST ACCOUNTING EXPERTS:

In Anglo-Saxon region, the field of management accounting includes all information "valued" that managers need, and not only information on costs, recognizing that the general

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subject of management accounting relating to economic resources mobilized not only in their consumption (Briciu S., 2010). Management accounting is defined in the literature as managerial accounting, analytical accounting (comptabilit analytique) or internal accounting. Management accounting is that accounting approach of an entity activity that allows separation and structure in subdivisions of property and financial results. In this way you can know how to generate profit or loss in the entity, and ways to influence its activity in order to increase profitability (S. Briciu, 2010). But a distinction must therefore be made thereby management accounting must include the specific elements of financial accounting (general) and of the second side of accounting, management accounting. A special place in the management accounting must be held by management control, which is responsible for the smooth operation of the informational system necessary in a decision making entity. Also must be included the internal audit, which helps the entity to achieve its objectives, making systematic assessments and improving risk management, control and management processes. In France, management accounting is defined "as a technical analysis" of the entity's activities and products manufactured by it having as an objective evaluation of products, works and services and the control of internal conditions of production through costs. Michel Capron, defines analytical accounting (management - Ed) "as a management tool that is arming the management of an enterprise to meet their information needs and to guide decisions." In the view of Henri Bouquin management accounting is "an information system that intends to help managers and influence behavior by modeling the relationship between resources consumed and aims pursued". Henri Bouquin (2004) believes that "the major role of management accounting is to produce information to enable modeling the relationship between resources deployed and the results obtained in return." Another definition of management accounting we discover at the U.S. National Association of Accountants (NAA) which defines management accounting as "the identification, measurement, collection, analysis, preparation, interpretation and transmission of financial information used by management of an enterprise for planning, evaluation and control of appropriate and responsible use of its resources."
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Chartered Institute of Management Accountants UK (CIMA) explain management accounting as "Management accounting is an integral part of management dealing with the identification, presentation and interpretation of information used for: the formulation of strategies, planning and control of activities, decision-making; the use of resources, information of members and other external information users, information of workers, protection of assets. " Management process is based on a wealth of information taken from the area of management accounting. As part of this information a very important role in the management of economic entities is the concept of cost and presenting it in different structures or different levels of responsibility. Planning the future activities of an entity, decisions that managers take within the entities (purchasing decisions, pricing decisions) are closely related to knowledge of costs. Cost accounting has a huge impact on the quality of decisions made by managers. Ebbeken et al. define cost as "an expense or an amount of expenditure associated with (and recognized) a resource consumption, a place of business, a product produced or reporting period". Bernard Y, Colli J.C. (1994), define cost as "amount expressed in general in currency, of the necessary expenditure for the purchase or production of a good or service." According to specialists Glautier M. and Underdown B. (2001) cost is the monetary expression of the effort that an entity must do to achieve its objectives. In the Anglo-Saxon literature there is consensus on the definition of cost, the cost is defined as an indicator of monetary sacrifice made to obtain and provide customer specific products or services, achieving a work or performance of an activity. Cost information is valuable in decision-making process to ensure the achievement of a production, an activity with a reasonable cost by eliminating waste and production factors which translate into greater efficiency.

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3
RESEARCH METHODOLOGY
3.1 3.2 3.3 3.4 3.5 Introduction Research Approach Secondary Data Objectives Of The Study Hypothesis Of The Study

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3
RESEARCH METHODOLOGY
3.1

INTRODUCTION:
This chapter describes the research process within which the purpose, aims and

research questions were created. The research approach and some options for methods of information gathering and analysis are also discussed. In the subsections, several sources are used in order to get a wider view of the research approach, the research strategy and the respondents, it also gives a wider view on how to, in the end, reach the purpose of this dissertation. When choosing a research approach, there are two methods to consider; the deductive and the inductive approach. The deductive approach is where a theory and hypothesis are developed and then design a research strategy to test the theory. This approach is widely used in scientific research and is a highly structured approach. The developed theory or hypothesises subject to a rigorous test in order to explain causal relationships between variables (Saunders, Lewis & Thornhill 2003).Using the inductive approach, where theory follows data, the research is characterized by the respondents of data and development of theory as a result of the data analysis. The inductive approach to research emphasizes the close understanding of the research context and gaining an understanding of the meanings humans attach to events. It seeks to develop an empirical generalization that describes patterns of data and it tries to identify or develop a
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theoretical proposition that is consistent with those patterns (Schutt, 1996). The purpose of applying this strategy to the research is therefore to understand the nature of the problem studied (Saunders et al., 2003). In this study both a quantitative and a qualitative research design have been used. The benefit of a quantitative research design lets the researcher to quantify the respondents answers towards certain variables, hypothesis or demographic data to draw statistical conclusions and comparisons. This is one of the foremost advantages of the quantitative design and a common design in scientific reports and studies in all areas.

3.2

RESEARCH APPROACH:
The survey method (questionnaires) was selected as the most appropriate method to

gather data from the students. Figure 3.1 uses a hypothetical-deductive mode (Sekaran,1992) and has distinct aspects: the process of developing the conceptual framework and the hypothesis for testing and the design that involves the planning of the actual study dealing with the aspects such as location, sampling and data software professionals. Dane (1990) defines survey research as method of obtaining information directly from a group of individuals. Chadwick, Bahr and Albrecht (1984) view it as a research technique that puts questions to a sample of respondents by means of a questionnaire or an interview. Selfadministered questionnaires, interview surveys, and telephone surveys are three main methods of survey research (Baker, 1988, Babbie, 1989).

Theron (1992) notes that the survey research process starts with the selection of valid measurement(s)/questionnaire(s) that contain the questions that measure the intended concept(s). Therefore, the questions need to be worded carefully and unambiguously, must be acceptable to the respondents, not give offence, and be easily understood by everyone. Once the questionnaire has been selected or developed, the respondents need to be selected. The relevant criterion in selecting respondents is that the questions should apply to the population from which the respondents have been selected (Theron, 1992). The next step was to administer the questionnaires.

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Baker (1988) discusses four types of questions that may form part of a questionnaire, viz. closed-ended questions, open-ended questions, contingency questions, and matrix questions. Linde Rothman and Sieberhagen (1999 cited in van Zyl, 2002) add that as selfevaluation questionnaires are usually quantified, it is easier to compare the scores of different individuals. Weiers (1988) further postulates that the analysis of questionnaires is easy due to the structured information in the questionnaire with minimal or no open-ended questions.

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Field work(establishing contact with students of various universities) Defining the research question Preliminary data gathering (review of Literature) Developing the theoretical framework for the study Generation of Research Questions

Instrument development Items and scaling

Conducting the survey Interviews and Analysis and findings of the Research

Discussion on findings

Conclusion and revisit the Literature

Chart 3.1 The Research Process Source: Sekaran, 2001

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Kerlinger (1986) however, found that the main problems experienced using questionnaires involve poor levels of response and the limitation of not being able to test the given response for accuracy. Furthermore, the validity of self-evaluation questionnaires may differ from situation to situation as some items are ambiguous and could be viewed as having two possible answers (Smith, 1981 cited in van Zyle, 2002; van Zyl& van der Walt, 1994). Adams and Schvaneveldt (1985) advise research design refers to a plan, blueprint, or guide for data employees of organisations and interpretation - set of rules that enable the investigator to conceptualise and observe the problem under study. Figure 3.1 as follows, provides a starting point by describing the research design used for this study.

3.3

SECONDARY DATA:
Secondary data is based on past research work on this area of study. They are data

from Internet, textbooks, government publications, unpublished research work and journals. Also, acknowledge authorities within the area of studies provided valuable materials for this study.

3.4

OBJECTIVES OF THE STUDY:

Costing serves number of purposes among which the following are considered to be

most important.
1. Ascertainment of cost : This was considered to be the primary objective of cost

accounting in the initial stages of its development. However, in modern times this has assumed the secondary objective of cost accounting. Cost ascertainment involves the collection and classification of expenses at the first instance. Those items of expenses which are capable of charging directly to the products manufactured are allocated. Then the other expenses which are not capable of direct allocation are apportioned on some suitable basis. Thus the cost of production of goods manufactured is ascertained. In this process, cost accounts involves maintenance of different books to record various elements of cost. Cost of production is ascertained by using any of the costing technique such as historical costing, marginal costing, etc.

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2. Cost control : At one time cost control was considered as secondary objective of cost
accounts. But in modern times it constitutes the primary purpose because of its utmost importance in all business undertakings. Cost control is exercised at different stages in a factory, viz., acquisition of materials, recruiting and deployment of labour force, during the production process and so on. As such we have material cost control, labour cost control, production control, quality control and so on. However, control over cost is exercised through the techniques of budgetary control and standard costing. The control techniques enable the management in knowing the operating efficiency of a business.

3. Determination of selling price : Every business organisation aims at maximizing

profit. Total cost of production constitutes the basis on which selling price is fixed by adding a margin of profit. Cost accounting furnishes both the total cost of production as well as cost incurred at each and every stage of production. No doubt other factors are taken into consideration before fixing price such as market conditions the area of distribution, volume of sales, etc. But cost plays the dominating role in price fixation.

4. Frequent preparation of accounts and other reports : The management of

every business constantly rely upon the reports on cost data in order to know the level of efficiency relating to purchase, production, sales and operating results. Financial accounts provide information only at the end of the year because closing stock value is available only at the end of the year. But cost accounts provide the value of closing stock at frequent intervals by adopting a continuous stock verification system. Using the value of closing stock it is possible to prepare final accounts and know the operating results of the business.

5. To provide a basis for operating policy : Cost data to a great extent helps in
formulating the policies of a business and in decision-making. As every alternative decisions involve investment of capital outlay, costs play an important role in decisionmaking. Therefore availability of cost data is a must for all levels of management. Some of the decisions which are based on cost are (a) make or buy decision, (b) manufacturing by mechanisation or automation, (c) whether to close or continue operations in spite of losses.

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3.5

HYPOTHESIS OF THE STUDY:

The present study is based on the following hypotheses:

H1: By providing cost data it helps management to fix the selling price in advance. Hence, quotations can be supplied to prospective customers to secure orders. H2: Cost accounting system enables employees to earn better wages through overtime wages and incentive systems of wage payment. H3: It increases the confidence of creditors in the capital employed in the business. H4: The accuracy of cost accounts get distorted owing to the use of notional cost such as standard cost, estimated cost, etc. H5: Cost accounting fails to take into account the social obligation of the business. In other words, social accounting is outside the purview of cost accounts.

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4
ANALYSIS AND INTERPRETATION OF DATA
4.1 Price Determination Of A Product (Baby Cloths) 4.2 How Gas Prices Are Determined

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4
ANALYSIS AND INTERPRETATION OF DATA

4.1 PRICE DETERMINATION OF A PRODUCT (BABY CLOTHS):

EXAMPLE 1 Albany Bibs and Bobs have decided to make clothes for young babies. They have signed a new contract with a major retailer for their clothes and need to calculate the cost price of the clothes. The direct material to make the clothes is Rs.75 The direct labour paid to make the clothes is Rs. 160. The business has estimated that its factory overheads for the next 12 months will be Rs. 150000. The business believes that it will have 6,000 direct labour hours over the time period and aims to have a prot margin of 30%.

EXAMPLE 1 SOLUTION Calculating Overheads 1,50,000 6,000 = Rs.25

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Cost Driver Direct Materials Direct Labour Factory Overheads Cost Prot Margin Final Cost

Figures Rs.75 Rs.160 Rs. 25 Rs. 260 Rs. 78 Rs. 338

4.2 HOW GAS PRICES ARE DETERMINED: Gas prices increase every summer, and oil companies report record profits just as Americans are preparing for the summer travel season. The two events rising fuel prices and increasing travel by Americans may seem more than coincidental. Fact is, gas prices are based on a combination of monetary and fiscal details: the price of crude oil, taxes, refining costs, and distribution costs.

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Figure 4.1 Factors Affected By Gasoline

Source :Energy Information Administration (March 2011)

The Energy Information Administration describes these pricing components as follows:

Taxes: the monthly national average of federal and state taxes applied to gasoline. Distribution & Marketing Costs: the difference between the average retail price of

gasoline and the sum of the other 3 components. These are the costs charged by a local retail gasoline station and include profits.

Refining Costs: the difference between the monthly average of the price of gasoline

and the average price of crude oil purchased by refiners. This also includes profits.

Crude Oil: the monthly average price of crude oil purchased by refiners. Crude oil

price is the single biggest factor in the price of gasoline. United States refineries produce approximately 90 percent of the gasoline used in the United States, with about 45 percent of U.S.-produced gasoline coming from refineries along the
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U.S. Gulf Coast. Less than 40 percent of the crude oil used by U.S. refineries is produced in the United States.

Why gas prices rise

Gas prices rise (or fall) primarily due to changes in the global crude oil market. Prices are also affected by variations in tax rates among states, in addition to refinery issues, and retail gasoline dealer issues like location, rent, and local competition.

Global market for crude oil

The price of crude oil is the main contributor to the general increase in retail gasoline prices since the start of 2009. Generally, a $10 increase in oil prices translates to a 25-cent increase in retail gasoline prices. Crude oil prices depend on several factors including worldwide supply and demand, stability of the distribution network, the value of the U.S. dollar, and price speculation.

Supply of crude oil: The Organization of the Petroleum Exporting Countries

(OPEC), a cartel of 12 oil-rich countries, which produces about 43 percent of the worlds crude oil, exerts significant influence on prices by setting production limits on its members. When the overall supply of crude oil decreases, the world market tightens and price usually rises. Restricting the supply pushes up pump prices by as much as 80 cents a gallon. OPEC countries have essentially all of the worlds spare oil production capacity and possess about two-thirds of the worlds estimated crude oil reserves.

Worldwide demand for crude oil: The United States consumes more oil and refined

products (such as, gasoline, diesel, heating oil, and jet fuel) than any other nation in the world. The demand for crude oil in China, India and other developing countries, however, has risen with their populations, increased trade, growing internal markets, and strong commodity prices. Developing nations are expected to account for nearly half of the global demand by 2015, up from 36 percent in 1996. Increasing demand leads to higher prices.

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Interruption of the distribution network: Interruptions in the flow of crude oil

through the distribution network can cause gasoline prices to rise, including natural disasters like Hurricane Katrina, the Gulf Coast-BP oil spill, or political instability in countries like Iraq, Libya, Yemen, Saudi Arabia, Venezuela, or Nigeria.

Value of the U.S. dollar: Oil is traded on the world market in U.S. dollars. When the

value of the dollar drops compared to other major currencies, producers earn less and compensate by raising the price per barrel of oil.

Commodities market speculation: Speculation in the commodities markets where

crude oil is traded also drives up the cost. Financial speculators make money on the fluctuations in prices of commodities like oil by placing bets that the price will go up or down. Some studies have shown that the speculative interest in crude oil markets has doubled, from 18 percent to 36 percent from 2003 to 2009. Speculative activity creates a cost premium estimated at about a fifth of the oil price or 20 cents of every dollar spent on gasoline. The U.S. Commodity Futures Trading Commission and the U.S. Department of Justice regulate and investigate speculation and illegal market manipulation in the crude oil market.

Tax impact on price at the gas pump

Federal, state, and local government taxes are the second largest part of retail gasoline prices. Federal excise taxes are approximately 18 cents per gallon, and state excise taxes averaged 22 cents per gallon at the beginning of 2011. As of January 2011, 12 states levy additional state sales and other taxes on gasoline.

Oil refining requirements and costs

Refiners typically earn about 20 cents for every gallon they process. Refiners lose money when plunging prices require them to sell gasoline for less than the crude oil they bought. Refining costs and profits vary due to the different gasoline formulations required in different parts of the United States.

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To comply with the Clean Air Act, refiners must switch to summer blend formulas for many urban markets on or around May 1 each year. Such blends are more complex and more expensive to make. Many contain ethanol, an alcohol mixed with gasoline to create a cleaner fuel that can account for up to 15 percent of some gasoline blends.

How your local gas station profits from gas sales

Retail dealers earn approximately 14 cents on every gallon of gasoline sold. Dealer costs include wages and salaries, benefits, equipment, lease/rent, insurance, and other overhead. An individual dealers cost of doing business varies depending on location and number of local competitors. Stations next to each other may have different traffic patterns, rents, and sources of supply that affect their prices. Gasoline often costs more in wealthy neighborhoods, because stations pass along higher real estate costs. Credit card companies also earn 2.5 percent of the transaction cost as opposed to a flat fee, which impacts dealer margins.

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5
FINDINGS, SUGGESTION AND CONCLUSION
5.1 Findings Of The Study 5.2 Suggestion Of The Study 5.3 Conclusion Of The Study

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5
FINDINGS, SUGGESTION AND CONCLUSION
5.1 FINDINGS OF THE STUDY:
. Cost Accounting is useful for identifying the exact causes for decrease or increase in the, profit/loss of the business. It also helps in identifying unprofitable products or product lines so that these may be eliminated or alternative measures may be taken. Cost Accounting is quite useful for price fixation. It serves as a guide to test the adequacy of selling prices. The price determined may be useful for preparing estimates or filling tenders. The use of cost accounting technique viz., variance analysis, points out the deviations from the pre-determined level and thus demands suitable action to eliminate such deviations in future. Cost comparison helps in cost control. Such a comparison may be made from period to period by using the figures in respect of the same unit of firms or of several units in an industry by employing uniform costing and inter-firm comparison methods. Comparison may be made in respect of costs of jobs, processes or cost centres. A system of costing provides figures for the use of Government, Wage Tribunals and other bodies for dealing with a variety of problems. Some such problems include price fixation, price control, tariff protection, wage level fixation, etc.

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5.2 SUGGESTION OF THE STUDY:

In today's economy, small businesses need to have an effective expense management system to compete. It is critical to choose the right product costing method in order to access the information that small business owners need to make decisions. Product costing, the system of tracking and analyzing the total cost of production and sale of goods and services, is an integral part of these decisions. Many companies employ simple accounting practices which can make honing in on specific costs difficult. Let's look at an accounting example using overhead costs and machine hours. If job A involves 100 machine hours and job B involves 50 machine hours, a simplified accounting method would allocate twice the overhead to job A as job B. Alternatively, a comprehensive product costing analysis would more accurately allocate costs to the production process. This simplistic type of accounting was developed in the old days of mass production when factories churned out the same small set of products day after day. For many smaller manufacturers and job shops, this is not today's reality. Every business is unique, so accounting for the distinct operations of individual businesses may produce a muddy financial picture. Most production processes have some differentiating factor. A production job might run sporadically, and it could require setup time or special engineering. If a production process uses special materials or components, extra costs could be associated with procurement and handling. Different factors in the production process could make it difficult for some small businesses to conduct proper accounting. However, there is a unique approach to product costing called activity-based costing, or ABC, that takes these factors into account. The great thing about ABC is that in order to realize the benefits, small businesses do not have to redo their books, change accounting processes, or hire experts.

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The main difference between ABC and traditional product costing is that ABC takes into account the cost of making a product at every level where costs are incurred. These levels include:
1. Unit level: Direct costs associated with making one unit that most manufacturers

already track. Such costs include touch labor, machine hours, and material costs.
2. Batch level: Costs, such as production, planning, and setup, which are associated with

every batch, regardless of the size of the order.

3. Product level: Development costs that includes idea generation all the way through

the initial production of the first good or service.

4. Business level: Overhead costs, ranging from utilities, rent, payroll, and other

expenses, that apply to the entire production process. Small business owners are able to make informed decisions with access to better information. Activity based costing is one accounting tool that can provide important data of a firm's expenses. Activity based costing may help small businesses solve the problem of being unable to accurately assign costs throughout the production process. Knowing exactly how much is spent at each point along the production chain enables businesses to wisely invest time and money.

5.3 CONCLUSION OF THE STUDY:

Throughout this paper we analyzed the existing concepts and approaches in economic literature and practice of management accounting, management control and accounting of the costs and tried to start a model of management accounting well founded and practical applicable. We appreciate that by starting to build this system and by implement it into a entity we achieved the objectives we had when we started research but also are aware that when the system will be used by others accountants many improvements will be found.

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Analyzing the model above, we consider that this management accounting system could be implemented in many entities, not only entities from the mining industry. With appropriate adjustments to their own situation, the system would lead to further information for decision makers and to a better organization of their work. In any productive economic entity it should be pursued with great care value for economic efficiency, which means making products more competitive as the price to be accepted by the market, in terms of costs as low as possible to ensure economic efficiency. The level of product quality and its price determines the cost, quality and cost is possible with a very strong relationship, based on which one can determine the extent to which the added value as a result of improving the quality justifies the cost increase. We are already working at a new improved material named intelligent management procedure, which will improve the level of information that managers will use in making decisions and of course can be adapted to others industrial activities. This will be the subject of a future research paper. Manager decisions, based on the relation between the information provided by Management Accounting and Financial Audit, which manager can ask in a special decision council for crisis periods and economical stagnation, can lead to the decrease of possible errors from accounting information which are offered by financial situations, information that are behind pertinent decisions.

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BIBLIOGRAPHY
BOOKS:

1. Dr. N.K. Agrawal (2003) Costing Accounting for C.A., Suchitra Prakashan Pvt.Ltd. 2. S.N. Maheshwari (2007) Cost Accounting (Problem and Theory), Mahavir Publication 3. B.K. Bhar (2009) Cost Accounting (Methods & Problems), Academic Publisher, Calcutta 4. Ashish K. Bhattacharya ( 2005) Principles and Practices of cost Accounting, A.H. Wheeter Publisher

WEBSITES: www.springerlink.com www.oxfordjurnals.org

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