The Hindu Business Line : Costing by Drury

Cost accounting is concerned with cost accumulation for stock valuation to meet the requirements of external reporting. A cost object is any activity for which a separate measurement of costs is desired. Cost objects are divided into three broad categories: costs for stock valuation, costs for decision-making and costs for control.

Conventional cost accounting data-collection systems accumulate costs by products to meet the financial accounting requirements of allocating manufacturing costs incurred during a period between cost of sales and inventories. Such data- collection systems are not designed to accumulate product costs for decision-making purposes.

For decision-making, costs and revenues can be classified according to whether they are relevant to a particular decision. Relevant costs and revenues are those future costs and revenues that will be changed by a decision, whereas irrelevant costs and revenues are those that will not be affected by the decision. For example, if one is faced with a choice of making a journey by car or by public transport, the car tax and insurance costs are irrelevant, since they will remain the same whatever alternative is chosen. However, petrol costs for the car will differ depending on which alternative is chosen, and those costs will be relevant for decision-making.

Opportunity costs are of vital importance for decision-making. If no alternative use of resources exists, then the opportunity cost is zero, but if resources have an alternative use, and are scarce, then an opportunity cost does exist. Sometimes the term shadow price is used to describe the opportunity cost of scarce resources.

A cost centre is a production or service location to which costs are assigned. Normally cost centres consist of departments, but in some instances they consist of smaller segments such as groups of machines within a department. In the US, the term cost pool is used instead of cost centre to describe any group of individual costs to which overheads are assigned in the first stage of the overhead allocation procedure.

Interlocking accounting is a system where the cost and financial accounts are maintained independently of each other, and in the cost accounts no attempt is made to keep a separate record of the financial accounting transactions.

A segment consists of a product, type of customer, geographical region, distribution channel or any other part of a firm that can be considered for expansion or reduction. Segmented profitability analysis is required for strategic decisions such as abandonment or expansion of specific segments.

A major limitation of feedback control is that errors are allowed to occur. The budgeting process is a feed-forward control system.

Be lead by Drury.

(Excerpts from "Costing — An introduction" by Colin Drury. Book courtesy: Taxmann Publications P Ltd, New Delhi. www.taxmann.com)

Dirty dozen

How to overcome the behaviour patterns that keep you from getting ahead? Read The 12 bad habits that hold good people back by James Waldroop and Timothy Butler. The idea of this book (originally titled Maximum success) is that most people learn their greatest lessons not from their successes but from their mistakes. Thus, the book offers the flip side to Stephen Covey's The 7 habits of highly effective people.

People who are extreme meritocrats are relatively rare in business, and are rarely very successful, perhaps because business almost always involves a compromise with perfection.

Heroes tend to bite off more than they can chew and in the midst of one project are already looking around for something else to tackle. Few companies can tolerate heroes indefinitely.

Although most of us have some healthy degree of aversion to angry confrontation, The clash of opposing ideas and strategies is a dynamic, creative process that reveals the strengths and weaknesses of each and leads to reconciliation at a higher level. You can't cook without heat. The peacekeeper is phobic about the possibility of confrontation.

The rebel stance is often dysfunctional in an organisational setting. Rebels are not typically seen as good team players, because they refuse to recognise the value of synergy.

Being patient, waiting until you have the right skills and knowledge, and waiting for the right time to put them into play does not mean resigning yourself to a life of mediocrity or a life of quiet desperation.

Don't hold yourself back... from reading about the "bad habits".

(Books courtesy: Fountainhead, Chennai. E-mail: fhbooks@satyam.net.in)

Tailpiece

"We educate the potential investors till they... "

"Become fully educated?"

"No, till they decide not to invest."

hindubusinessline@hotmail.com

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