Definition: Lower of cost or market, often abbreviated LCM, is an accounting method for valuing inventory. Under this concept stability in prices of assets while recording is achieved. For example, in an organization manufacturing toy the material and labour cost will be dependent on the production. Such costs involve “financial expenditure at some time and hence are … Unique Feature of Cost Audit: The audit of cost accounts has attained its present status in the statute book of our country through a gradual process of … Concept of Cost Audit. The cost concept of accounting states that all acquisition of items (such as assets or things needed for expending) should be recorded and retained in books at cost. Cost behavior is an indicator of how a cost will change in total when there is a change in some activity. Ltd. ClearTax offers taxation & financial solutions to individuals, businesses, organizations & chartered accountants in India. As per this technique, the management may decide the number of units to be produced. Familiarize yourself with the most important formulas, terms, and principles you need to know to apply […] For a standard manufacturing unit the various costs involved can be segregated into the following : These can be further segregated into the following: Say a toy manufacturing unit procures plastic as a raw material. Question: Describe the nature of the following costs and give reasons for your answers. In traditional accounting, the profit and loss is derived by deducting expenses from income whereas in cost accounting the motive is to be cost effective by reducing costs of process, production or project. On the contrary, the concept of cost which normally enters into the accounts of a business is known as outlay cost. The cost concept is one of the basic underlying guidelines in accounting and understanding which enables accountants to maintain the accuracy in the profession. The cost of an item may well be different from its true value but since ascertainment of true value would be judgmental and therefore subjective, stating assets at historical cost is generally accepted as fairway of maintaining records. Discuss the role of the cost accountant in a manufacturing organisation How are costs classified? The different methods of costing used by different businesses are summarized here under : The Institute of Cost Accountants has constituted Cost Accounting Standards Board (CASB) to provide guidance and uniformity in costing. Define the term ‗cost‘. Cost is defined as “the amount of expenditure (actual or notional) incurred on or attributable to a given thing or to ascertain the cost of a given thing”. Cost Concepts and Classifications - AccountingVerse Cost Concepts and Classifications Cost is "a foregoing, measured in monetary terms, incurred or potentially to be incurred to achieve a specific objective" (American Accounting Association). Further you can also file TDS returns, generate Form-16, use our Tax Calculator software, claim HRA, check refund status and generate rent receipts for Income Tax Filing. Moreover, the present value of assets constantly undergoes change with the result that if we were to record the assets on the basis of their present value, we would require to alter them practically every day. After reading this article you will learn about Cost Audit:- 1. Such revaluations (whether upwards or downwards) have to be disclosed in terms of the amount and date of the revaluation for a subsequent period of five years. Historical cost is verifiable. $1,00,000. Cost accounting centers around recognizing and reporting costs in different ways. Process costing – The processes involved are easily distinguished. The requirements of majority of them are satisfied by means of financial accounting. In this technique of costing the costs incurred are compared to the predetermined cost of the product, process or project. Using the word value in this sense, it may be said that balance sheet values generally represent cost to the accounting unit or some modification thereof; but sometimes they are determined in other ways, as for instance on the basis of market values or cost of replacement, in which cases the basis should be indicated in financial statements, The word value should seldom if ever be used in accounting statements without a qualifying objective. Our experts suggest the best funds and you can get high returns by investing directly or through SIP. The cost principle requires that assets be recorded at the cash amount (or the equivalent) at the time that an asset is acquired. Thus when X starts Save taxes with ClearTax by investing in tax saving mutual funds (ELSS) online. This is what lead to the invention of what is now the modern cost accounting process in use. Realisation / Realization Concepts. Why, then, is this concept which is inconsistent with the relevance convention (since present values are relevant to most end-users) still adopted? ClearTax serves 2.5+ Million happy customers, 20000+ CAs & tax experts & 10000+ businesses across India. Duel Aspect Concept. The primary one, of course, is that most people cannot agree on what is the present value of an asset while the price paid in terms of money as the acquisition cost of the asset is beyond dispute in most cases. Advantages/ objectives of a business buys a building worth $ 1,00,000 less.... Problem, e.g useful simply as a practical matter, cost is defined as the cash or! The businessmen to record and keep a track of their costs and comparing them with standard costs. product noted... The role of the production process for one semester is $ 25,00 of such a case would the. Called opportunity cost of attending accounting class for one semester is $ 25,00 a reasonable profit variable... 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