Lecture Notes on Financial Accounting Limitations and Cost Accounting

Introduction

• Focus on important theories only.
• Discuss key questions related to financial accounting limitations and cost accounting.

Limitations of Financial Accounting

• Main Limitation: Records all expenses but does not classify costs properly.
• Expenses are thrown into P&L debit without specifying if they are related to manufacturing or services.
• Detailed Points:​
  • Does Not Give Classification: Financial accounting does not provide the classification of cost figures or differentiate between departments.
  • Adequate Cost Figures Not Provided: Does not provide proper cost figures, including variable and fixed costs.
  • No Disclosure of Reasons for Variations: Variations like wage or cost changes are not identified or disclosed.
  • Direct and Indirect Expenses: Fails to correctly display direct and indirect expenses.

Classification of Costs

• Financial accounting does not classify costs into manufacturing, wages, variable, or fixed costs accurately.
• Classification is necessary for genuine cost control and to avoid financial accounting limitations.
• Focuses on providing only expense records and not the reasons or classifications behind them.

Cost Accounting Necessity

• Some argue cost accounting is unnecessary, expensive, and a luxury, but it's essential for large organizations.
• Arguments For Cost Accounting:
  • Necessary to compete by reducing product costs.
  • Proper detailed information helps in efficient business management.
• Arguments Against Cost Accounting:​
  • Considered expensive due to high salaries for expert cost accounting staff.
  • Viewed as luxury or unnecessary duplication of financial accounting.
• Counter Arguments:​
  • Competition and the requirement for detailed cost control justify its necessity.

Important Cost Accounting Concepts

• Cost Centre vs. Cost Unit:​
  • Cost Centre: The entire factory or department cost (example: manufacturing department).
  • Cost Unit: Cost per unit of production (example: cost of a single manufactured unit).
• Job Costing:​
  • Done against orders specifying customer requirements.
  • Each job is treated individually with a separate cost record.
• Contract Costing:​
  • Used for large construction contracts treated similarly to job costing.
• Batch Costing:​
  • Large orders divided into smaller, manageable batches each considered as a job.

Additional Concepts

• Direct Costs:​
  • Directly identifiable costs like prime costs, wages, and raw materials used in manufacturing a product.
• Indirect Costs:​
  • Costs that cannot be directly attributed to a single product or service such as salaries, rent, etc.
• Variable Costs:​
  • Costs varying with production levels (example: direct materials cost).
• Fixed Costs:​
  • Costs that remain constant regardless of production levels (example: rent).
• Controllable vs. Uncontrollable Costs:​
  • Controllable Costs: Costs that management can influence and control, like material costs.
  • Uncontrollable Costs: Costs that are not easily influenced by management decisions (example: rent).

Summary and Conclusion

• Thorough understanding of key concepts is critical for accounting exams.
• Emphasis on differentiating between cost accounting and financial accounting limitations.
• Regular reviews and reading recommended for retaining critical theories and principles.