Fundamental principles of costing

In this article you will read about the fundamental principles of costing

1.       Cost is related to its cause. A cost is related as closely as possible to its cause. Rent of the factory, for instance, cannot be charged to office expenses, repairing charges of a machine cannot be charged to some other machine, and in the same way, a foreman’s salary cannot be charged to one single unit, if many more units are produced in a department supervised by that foreman. The reason in all the above cases is that cost is related to its cause.

2.       Cost is charged after it is incurred. If a cost is not incurred either actually or notionally, it cannot be charged to a cost centre. For instance, a cost unit is not charged with selling costs while it is still under manufacture in the factory, as selling costs would occur only when the cost unit is finished in the factory and is sold. Similarly, normal loss or wastage is to be borne by the units of which it is a loss or wastage, such a loss is not imposed on those units which are yet to pass the point of loss.

3.       Abnormal costs are excluded from costing. A cost to meet the loss caused by fire, riot, theft or accident is an abnormal cost. This cost is not charged to production as it is not related to production part. The presence of abnormal cost in costing would only distort cost figures and mislead the management for the purposes of cost control and decision-making. Similarly such financial expenses as have little or no relationship with costing, are also considered abnormal and are not charged to costing.

4.       Past records are not charged to future periods. A past cost is one from which no more benefit is to accrue. If, however, a past cost is such the benefit of which is to accrue in a future period also as for instance, advertisement expense being treated as deferred revenue expenditure, then it is not a past cost and it can be charged during the period of benefit.

5.       The concept of conservatism has no place in costing. The closing stock in financial accounting is valued at cost price or the market price, whichever is less, but in costing, the closing inventory and stocks are valued at cost only. There is a value attached to the concept of conservatism in financial accounting but it is not so in costing. Cost statements are required to be prepared so as to state facts with mo known bias. If, however, a contingency is to be taken into consideration in cost accounting, it should be so stated and shown distinctly.

6.       Accounting for cost is based on double-entry principle. The cost ledgers and other cost control accounts are kept on the double-entry principle- the same principle which is adopted so exhaustively in financial accounting. Costing, however, requires a greater  use of cost-sheets and cost statements for the purpose of cost statements for the purpose of cost ascertainment, cost control and guidance to management.