Introduction To Cost Accounting

Cost Accounting

Cost accounting is one of the branches of accounting. Cost accounting has been developed to mitigate the limitation financial accounting originally had. According to C. Gillespie – “Cost accounting is a set of producers for determining the cost of a product and various activities involved in its manufacture and sales and for planning and measuring performance.

Key Takeaways

  • The three major branches of accounting are financial accounting, cost accounting, and management accounting
  • Cost accounting keeps the record and makes report according to the costs of output to the firm’s management
  • One of the key mission of cost accounting is to identify the costs of process, unit, output, job, and department and report them for different uses
  • Cost accounting sets the base for a cost estimate, cost control, and price determination of output
  • Cost accounting helps accountants make a decision and evaluate performance according to the total cost of the company

FEATURES OF COST ACCOUNTING

FEATURES OF COST ACCOUNTING

Cost Accounting has numerous, unique features. The following are the main features of cost accounting nature: 

What Is It?

Cost accounting is a branch of accounting. 

Why Is It Important?

Cost accounting is concerned with recording and reporting accordingly for costs of output to the firm’s management.

1. Objective: The main objectives of cost accounting are to accrue costs of process, unit, output, job, and department and report them for different uses.

2. Status: Cost accounting complements and mitigates financial accounting as it provides cost data of different kinds of stock. The different kinds of stock can help accountants prepare financial statements.

3. Basis: Cost accounting sets the base for a cost estimate, cost control, and price determination of output.

4. Usefulness: Cost accounting helps accountants make a decision and evaluate performance as it uses absorption or valuation costing techniques. This is useful in preparing income statements.

Objectives Of Cost Accounting: Brief Discussion 

Objectives Of Cost Accounting

There can be several objectives of cost accounting. However, the following are its most important objectives:

To Determine Cost:

The cost of a product service or job has to be determined for budget allocation. And, cost accounting helps determine the cost. The objective of cost accounting is to deal with the cost of products or services as the name implies. 

Determination of cost involves the process of determining cost after the cost has been reported. In general, there are two methods accountants apply to determine the cost i.e job costing and process costing. 

Different methods of the cost may be applied according to the differences in the nature of the activity of the industry.

To Control Cost:

The objectives of cost accounting are to manage the cost. And, accountants apply various techniques such as inventory control, standard costing, marginal costing, etc.

To Provide Information For Decision Making:

Cost accounting describes the formal system involving accounting. And, the subject provides information for various managerial decisions, such as,

1. Whether to accept or reject the offer related to accounting 

2. Decision-related to manufacturing or purchasing a product

3. Whether to reuse or replace the existing machine and

4. Whether to junk or continue the product or services

To Secure The Selling Price:

The detailed information related to the cost of a product or service is to be determined. And, cost accounting helps accountants to determine the selling price.

To Determine Costing Profit Or Loss:

The total cost and total revenue of every product or service are helpful for determining profit or loss. Cost accounting ascertains job production and calculates profit or loss by comparing with revenue and cost.

To Offer Information In Preparation Of Fiscal Statements:

Inventory should be valued according to the preparation of financial statements. The data can be derived by comparing cost price and market price.

Importance And Advantages Of Cost Accounting

Cost accounting offers vast advantages to a firm. The importance of cost accounting is explained below:

Helping In Determination Of Cost:

Cost accounting applies different methods of costing for calculating job costing, process costing, etc. Applying this costing method, accountants can ascertain the cost of each product, process, or job. 

Helps In Inventory Control:

Cost accounting is effective in inventory control using various techniques. The techniques involve ABC analysis, economic order quantity, stock level, etc.

Helps In Measurement Of Efficiency:

Cost accounting is the measurement of competence of operations through the organization if standards and diverse analysis.

Helps in preparation of budget:

It helps in the preparation of various budgets such as sales budget, production budget, material purchase budget, flexible budget, etc. 

LIMITATIONS OF COST ACCOUNTING

LIMITATIONS OF COST ACCOUNTING

Cost accounting is developed to mitigate the limitations of financial accounting. However, it also has a number of limitations such as follows:

Unnecessary: Duplication of work sometimes render the concept of cost accounting unnecessary. Many good enterprises are functioning without the application of any coating system.

Expensive: The installation of a cost accounting system requires additional costs. As a result, cost accounting may get expensive.

Inapplicable to many industries: It has limitations for being applied to many industries. A single costing system may be rendered unnecessary to all industries. It is because the costing system may be specially designed to meet the need of a specific industry.

Lack of uniform procedure: Two equally competent cost accounts may arrive at the different result from the same information.

BOTTOM LINE 

The fiscal transaction requires proper recording. Systematic classification and analysis of accountants can be achieved with the application of accounting branches. Cost accountant helps you know profit or loss and financial position with a financial transaction.

References:

1. https://www.investopedia.com/terms/c/cost-accounting.asp
2. https://www.accountingnotes.net/cost-accounting/what-is-cost-accounting-2/17513

Last Updated on October 28, 2022 by Magalie D.

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