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Cost Accounting [Definition, Objectives & Importance]

Cost Accounting is defined as the process of measuring, analyzing, and reporting financial and nonfinancial information related to the costs of acquiring or using resources in an organization.

Basically, Cost Accounting deals with the collection, analysis of relevant cost data for interpretation and presentation for various problems of management.

Role of Cost  in Decision-Making

Every decision involves a choice between at least two alternatives. For choosing between alternatives, the cost is an important factor. We choose the alternative that provides more benefit at a lesser cost.

The cost of production of every unit, job, operation, process, department or service can be ascertained by various costing methods under cost accounting.

Cost Accounting is an internal reporting system for a company’s own management for decision making.

In Cost Accounting, our goal is to assist managers in achieving the maximum value for their organizations. Measuring the effects of decisions on the value of the organization is one of the fundamental services of cost accounting.

Cost Accounting assists the management of the company in the following ways;

  • It provides accurate cost data.
  • Accumulation and utilization of cost data for cost control so that the costs are kept at a minimum level under efficient operating conditions.
  • It develops Estimates, Budgets, Norms, Standards for management control over costs ie., control of material cost, control of lab cost and control of overheads.
  • It enables the management to determine and analyze the cots sales and profit of a business and to compare the operating costs of different products, services, divisions/ departments cost centers and other units of activity in order to evaluate the operating efficiency.
  • By matching of cost and revenue, it helps management to ascertain the profitability accurately even at short intervals.
  • By distinguishing the fixed and variable items of costs, it helps management in decision-making such as make or buy decisions operation by manual or machines, continue or discontinue a product etc.
  • It also helps management in the areas of planning, policy-making pricing, production planning, product- mix, sales-mix. plant replacement and expansion/ diversification etc., for the purpose of profit maximization.

Main Objectives

The following are the main objectives of cost accounting;

  1. Ascertainment of cost of production of every unit, job, operation, process, department or service.
  2. Determining the selling price.
  3. Cost control by developing cost standards or budgets.
  4. Ascertainment of profit of each activity.
  5. Assistance to management in its task of planning and decision-making.

Cost Accounting System

Accounting systems are important because they are a primary source of information. Cost accounting systems provide information to help managers make better decisions.

If you install a sound cost accounting system in your organization, then it provides the following advantages;

  • To indicate to the management any losses or inefficiencies occurring in any form such as waste- whether of materials, time expense or in the use of machinery and equipment.
  • To reveal sources of economies in production, having regard to methods, types of equipment, design, cost centres or responsibility centres, output and layout.
  • To provide data for periodical P & L accounts and Balance Sheets
  • To provide such information upon which estimates and tenders
    may be based.
  • To provide actual figures of cost for comparison with estimates, standards or budgets and to serve as a guide for future estimates.
  • Profitable and unprofitable activities are disclosed.
  • Determination of selling price; i.e. to assist the management in their price-fixing policy.
  • The exact cause of variance in the profit or loss can be located.

Costing Methods

The methods to be used for cost ascertainment depend on the nature of the industry. Costs of production or service rendered differ from industry to industry.

The following table showing the costing methods used in different industries with final cost units:

Costing Method Name of Industry Cost Unit
Job Costing
Furniture
Per Unit
Job Costing
Ship Building
Per Ship
Batch Costing
Ready made garments
Per batch of dozen
Contract Costing
Building
Per Contract
Contract Costing
Road Construction
Per Km.
Single or Output Costing
Colliery
Per Ton
Process Costing
Chemicals
Per ltr. Gallon etc
Operating Costing
Transport
Passenger-Km. Ton- Km

The costing methods are broadly categorized in two:

  1. Specific order Costing
  2. Continuous Operating Costing

1. Specific Order Costing

Specific order costing methods are used by business organizations involve in make, assemble, construct Jobs or Products to individual customers specific orders.

The specific order costing is further classified into:

  1. Job Costing
  2. Contract Costing
  3. Batch Costing

2. Continuous Operation Costing

Where organizations which involve in mass production of products, through continuous operations, which will then be sold from stock and will not be produced the specific requirements of the customers.

The continuous operation costing is classified into the following:

  1. Process Costing
  2. Operation Costing
  3. Output Costing
  4. Service Costing

Role of Cost Accountant

A cost accountant assists the management of a business organization in planning, controlling and decision-making in respect of operational activities of the organization.

a) Cost ascertainment: Classification of cost into direct and indirect; classification of indirect costs (known as overheads) into factory overheads, administration and selling and distribution overheads, segregation of semi-variable into fixed and variable overheads.

(b) Cost Comparison: Comparison of actual cost with standard cost or budgets, determination of variances, reasons for variances and reporting to management for taking suitable action.

(c) Cost reduction measures.

(d) Cost Control aspects.

(e) Cost reports on the above variance, inefficiency, waste, etc.

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