![]() ![]() Principles of Double Entry Should be Followed Preferably: If done so, it will distort the cost figures and mislead management resulting in wrong decisions. Exclusion of Abnormal Costs from Cost Accounts:Īll costs incurred because of abnormal reasons (like theft, negligence) should not be taken into consideration while computing the unit cost. Past costs (which could not be recovered in past) should not be recovered from future costs as it will not only affect the true results of future period but will also distort other statements. Past Costs Should not Form Part of Future Costs: For example unit cost should not be charged with selling cost while it is still in factory. Unit cost should include only those costs which have been actually incurred. Charge of Cost Only after its Incurrence: A cost should be shared only by those units which pass through the departments for which such cost has been incurred. ![]() Each item of cost should be related to its cause as minutely as possible and the effect of the same on the various departments should be ascertained. Cause-Effect Relationship:Ĭause-effect relationship should be established for each item of cost. General Principles of Cost Accounting :įollowing are the main principles of Cost Accounting: 1. If care is taken to devise a costing system to suit the requirements of the industry and avoid unnecessary elaboration, expenditure incurred in installing and operating the system will be a profitable investment and will bring adequate return. It may be stated in this connection that a costing system must be a profitable investment and should produce benefits commensurate with the expenditure incurred on the system. It is said that the cost involved in installing and working a cost system is out of all proportions to the benefits derived therefrom. If this is not done, the system is bound to degenerate into a mere matter of forms and rulings. Forms and rulings are essential for a costing system but they must be revised and brought up-to-date in the light of altered conditions. It is the fault of the way in which the system is maintained. It is argued that after some time, a costing system degenerates into a matter of forms and rulings. So it is hasty to find fault with the system, if it fails to produce the desired results. The failure of a system may be due to several causes such as apathy or indifference of management, lack of adequate facilities, non-co-operation or opposition from the employees. It is argued that the adoption of costing system failed to produce the desired results in many cases and, therefore, the system is defective. The system of costing should be so devised as to suit the business but not the business to suit the system. It should be clearly understood that there is no stereotyped system of costing which can be applied to all types of industries. But in many cases some methods of costing can always be devised to suit the requirements of the business. It is true that costing cannot be applied with advantage to trading concerns and concerns of small size. ![]() It is argued that modern methods of costing are inapplicable to many types of industries. Many industrial failure.’ in the past may be attributed to the lack of knowledge on the part of manufacturer of actual cost of production and, therefore, selling products below cost. This argument overlooks the fact that modern industries are running under highly competitive conditions and that every manufacturer should know the actual cost of production to decide how far he can reduce the selling price. It has been argued that costing is of recent origin and that industries prospered in the past and are still prospering without the aid of costing and, therefore, expenditure incurred in installing a costing system would be an unnecessary expenditure. Objections Against Cost Accounting:Ī number of objections are generally raised against the introduction of costing on various grounds.įollowing are some of the important objections usually raised: 1. (3) Providing useful data to management for taking decisions. ![]()
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