Cost Accounting Systems

A cost accounting system (also called product costing system or

costing system) is a framework used by firms to estimate the cost of
their products for profitability analysis, inventory valuation and cost
control.

Estimating the accurate cost of products is critical for profitable

operations. A firm must know which products are profitable and
which ones are not, and this can be ascertained only when it has
estimated the correct cost of the product. Further, a product costing
system helps in estimating the closing value of materials inventory,
work-in-progress and finished goods inventory for the purpose of
financial statement preparation.

There are two main cost accounting systems: the job order costing and
the process costing.

Job order costing is a cost accounting system that accumulates

manufacturing costs separately for each job. It is appropriate for firms
that are engaged in production of unique products and special orders.
For example, it is the costing accounting system most appropriate for
an event management company, a niche furniture producer, a producer
of very high cost air surveillance system, etc.

Process costing is a cost accounting system that accumulates

manufacturing costs separately for each process. It is appropriate for
products whose production is a process involving different
departments and costs flow from one department to another. For
example, it is the cost accounting system used by oil refineries,
chemical producers, etc.
There are situations when a firm uses a combination of features of
both job-order costing and process costing, in what is called hybrid
cost accounting system.

In a cost accounting system, cost allocation is carried out based on

either traditional costing system or activity-based costing system.

Traditional costing system calculates a single overhead rate and

applies it to each job or in each department.

Activity-based costing on the other hand, involves calculation of

activity rate and application of overhead costs to products based on
their respective activity usage.

Based on whether the fixed manufacturing overheads are charged to

products or not, cost accounting systems have two variations: variable
costing and absorption costing. Variable costing allocates only
variable manufacturing overheads to inventories, while absorption
costing allocates both variable and fixed manufacturing overheads to
products. Variable costing calculates contribution margin, while
absorption costing calculates the relevant gross profit.

Still further refinement to costing accounting systems include JIT-

costing, back-flush costing.
 Cost Audit is applicable to:
o Companies occupied in manufacturing, production or
processing of goods or services.
o Both Private Limited & Public Limited Companies are covered.

These Companies are covered under Cost Audit if any of the

following criteria is fulfilled:
o Company Listed on Stock Exchange, or
o Net worth exceeds Rs. 5 crores, or
o Turnover of the company exceeds Rs. 20 crores

Cost Audit is mandatory for the financial year 2011-12 and

onwards.
(If a company is covered once on the basis of above criteria, the Cost
Audit will remain mandatory even if turnover of the company is reduced in
the subsequent years)

Companies whose Cost Audit Orders were issue on case to case

basis as per earlier Rules, shall continue to be covered under Cost
Audit whether they fulfill the above criteria or not.

Activities covered under Pharmaceutical Industry

Chapters 29 and 30 of Central Excise & Tariff Act, 1985 or
Production, processing, or manufacturing of bulk drugs or formulations
and includes the meaning assigned to them under the Drugs (Prices
Control) Order 1995

Cost Accounting Records:

Cost Accounting Records are to be maintained as per Cost
Accounting Records (Pharmaceutical Industry) Rules, 2011,
and
Cost Accounting Standards issued by the Institute of Cost
Accountants of India.
(Presently CAS 1-18 have been issued)
Cost Accounting Records are required to be maintained for atleast 8
financial years.

Cost Audit Report:

It is to be prepared on the basis of Cost Audit Report Rules, 2011
Submission of Cost Audit Report:
It is to be submitted online to Ministry of Corporate Affairs.
 If Company is following April to March financial year, then the Cost
Audit Report for the Financial year 2013-14 is required to be
submitted by 27th September, 2014 (i.e., 180 days from the close of
financial year)
APPLICABILITY OF COST AUDITS