The important fundamental Principles of Costing are as follows:
(1) Cost is always related to its cause:
It has been noticed that a cost is related as closely as possible to its cause. The figures of costs are collected and analysed ‘according to the nature and are allocated or apportioned on a basis of cause relationships.
(2) Abnormal costs are charged in costing:
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A cost incurred to meet the loss by fire, riot, theft or accident is called an abnormal cost. This cost is not charged to production as it has nothing to do with the production part. This will only distort cost figures and mislead the management for purposes of cost control.
Therefore, the normal cost incidental to production or service is charged to cost centers and not the abnormal ones. Further, such type of financial expenses which have title or no relationship with costing are also considered as abnormal and are not charged to costing.
(3) Cost is charged after it is incurred:
If the cost has been incurred it is considered no cost and it cannot be charged to a cost centre. For example – normal loss or wastage is to be borne by that unit only where loss has incurred. Such loss is not imposed on those units which are yet to pass or which are yet to come for production.
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(4) Past costs are not taken into consideration to future costs:
It is generally the system that the cost of any period should be met in that period itself. If the costs of the past period are taken to a future period for recovery it would be a wrong step, because the future period costs will be unnecessarily over burdened with the load of the past costs and it may lead to misunderstanding.
Exception to this consideration is advertisement: Advertisement expenses are being treated as a deferred revenue expense, therefore, it can be charged during the period of benefit.
(5) Keeping of accounts for cost is also based on Double entry principle:
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The Cost Ledgers and other cost control accounts are kept on the double-entry principle. The same principle is also adopted in financial accounting. Costing no doubt requires a greater use of cost-sheets and cost statements for the purpose of cost ascertainment, cost control and guidance to management.