In India, financial statements are prepared on the basis of accounting standards issued by the Institute of Chartered Accountants of India (ICAI) and the law laid down in the respective applicable acts (for example, Schedule III to Companies Act, 2013 should be compulsorily followed by all companies). The ICAI also releases guidance notes from time to time on various topics to help in the accounting process and provide clarity. While the basic accounting principles may not directly form part of the accounting standards and the related laws, they are assumed and expected to be universally followed.
Cost accounting can be most useful in budgeting and setting up cost reduction systems as a method for management, which will increase the company’s net profits in future. Compliance with the Cost Accounting Standards
The Cost Accounting Standards will be mandatory from the respective date(s) mentioned in the Cost Accounting Standard(s). Many of the principles stipulated in the Cost Accounting Standards issued by CASB are applicable to entities engaged in manufacture of goods and/or rendering of services. Historical costs are costs whereby materials and labor may be allocated based on past experience. Accountancy is often referred to as an art – the art of recording, classifying and summarizing financial information.
Cost Accounting Disadvantages
As per section 148(1) of the Act read with
Rule 3 of the Cost Audit Rules the Central Government by order may
ask for cost accounting records only of the companies who are
engaged in either the manufacturing of certain goods or the
companies which provide services. This forms the only basis for the
concept of the cost audit i.e., only the manufacturing companies or
the service provisioning companies are to be cost-audited. In modern cost account of recording historical costs was taken further, by allocating the company’s fixed costs over a given period of time to the items produced during that period, and recording the result as the total cost of production. This allowed the full cost of products that were not sold in the period they were produced to be recorded in inventory using a variety of complex accounting methods, which was consistent with the principles of Generally Accepted Accounting Principles (GAAP). It also essentially enabled managers to ignore the fixed costs, and look at the results of each period in relation to the “standard cost” for any given product. Procedure for revision of the Standards and Guidance Notes issued by the Board
The CASB undertakes revision of the Standards and Guidance Notes based on the subsequent legal or professional requirements or any other national or international developments in the field of Cost Accounting.
- Cost accountants, therefore, concentrated on how efficiently managers used labor since it was their most important variable resource.
- However, if free rein is given on the system of accountancy to be followed, there will be no limit on the scope of manipulation of accounts.
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- As is the case with any form of art, accountancy also involves the use of one’s creative skills, to maintain a record of financial transactions.
- Traditional standard costing must comply with generally accepted accounting principles (GAAP) and actually aligns itself more with answering financial accounting requirements rather than providing solutions for management accountants.
- Costing information provides feedback on past performance but should also be used effectively to motivate future performance.
The procedure followed for revision is the same as that followed for formulation of a new Standard and Guidance Note as the case may be, as detailed above. Limited revision of Standards and Guidance Notes due to change in reference of Act and Rules thereof shall be carried cost accounting standards india out by the Board and Standards with approval of the Council of Institute. Also limited revision due to adoption of standardized definition in any standard shall be carried out in all the Cost Accounting Standards by the Board with approval of the Council of Institute.
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Post-World War II, all economies, irrespective of their economic structure, started to lay much greater emphasis on cost accounting principles and ensured that all business organizations follow them, at the very least when dealing with the state. Cost accounting was developed as a separate discipline in accountancy, and promoted efficiency in resource utilization. Gradually, new skills developed in this field and it slowly attained a prime position in any organization’s functioning.
As is the case with any form of art, accountancy also involves the use of one’s creative skills, to maintain a record of financial transactions. However, if free rein is given on the system of accountancy to be followed, there will be no limit on the scope of manipulation of accounts. IFAC also provides International Good Practice Guidance for professional accountants in business. The Chairman, CASB with the approval of the President can co-opt experts, as may be required, to be invited to the meeting/s of the Board.
Mandatory Applicability (1 April
Cost accounting is sometimes used to assist decision-making by management within a business, whereas financial accounting is usually used by outside investors or creditors. Qualifying Assets are those assets which take substantial time to be ready for the intent of sale or use. Generally, a period of 12 months is considered as a substantial period unless a shorter or longer period can be justified based on facts and circumstances of the case. This flows directly from the application of
section 6 of the General Clauses Act, 1897, which provides that in
case any law is repealed, anything that was not in force or
existing at the time of such repeal, cannot be revived. Thus, in
case of investigations or proceedings which have been initiated
after such amendment, the law will have to be read as amended and
as decriminalized by the amendment. (It is important to note that
for the purpose of applicability of section 6 of the General
Clauses Act, the term ‘repeal’ shall include
‘omission’, which has been carried out w.r.t. section 148
by the above stated amendment).
- This allows the business to determine the cost per unit of production and make decisions about pricing and resource allocation.
- Workers often did not know how many hours they would work in a week when they reported on Monday morning because time-keeping systems (based in time book) were rudimentary.
- Many financial and cost accountants have agreed on the desirability of replacing standard cost accounting.
- By the early 20th century, cost accounting had become a widely discussed subject in the literature of business management.
- Also limited revision due to adoption of standardized definition in any standard shall be carried out in all the Cost Accounting Standards by the Board with approval of the Council of Institute.
This led to adoption of practices with a lack of uniformity in preparation and presentation of cost statements. To promote uniformity, there was an urgent need to integrate, harmonize, and standardize the cost accounting principles and practices. Therefore, the Generally Accepted Cost Accounting Principles have been clearly defined and well documented in the form of the Cost Accounting Standards. The Cost Accounting Standards are principles based, deal with the principles of costing, and provide guidance on the preparation of General Purpose Cost Statements, which require attestation by the cost accounting profession, wherever applicable.
Importance of Cost Accounting
As far as maintenance of cost accounting records under the Companies Act or any other statute is concerned, relevant matter covered under the standards, wherever applicable shall be followed. In the event of any deviation from the Cost Accounting Standard, it will be their duty to make adequate disclosures in their cost audit reports so that the users of cost statements may be aware of such deviation. In line with this framework, and even prior to the foundation of IFAC, professional and regulatory bodies all over the world develop accounting standards based on generally accepted principles and practices followed in their countries. These have been enforced through law, promoted by a regulatory mechanism, or voluntarily followed by all business entities. Standards help to ensure uniformity and consistency in the preparation and reporting of various financial statements. The ICAI-CMA, formerly the Institute of Cost and Works Accountants of India, was established in 1944 as a registered company under the Companies Act, and is the only recognized statutory professional organization and licensing body in India specializing exclusively in Cost and Management Accountancy.