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- 1 INTRODUCTION
- 2 FEATURES OF COST ACCOUNTING
- 3 Objectives of Cost Accounting: Brief Discussion
- 3.1 To determine cost:
- 3.2 To control cost:
- 3.3 To provide information for decision making:
- 3.4 To secure the selling price:
- 3.5 To determine costing profit or loss:
- 3.6 To offer information in preparation of fiscal statements:
- 3.7 Importance and advantages of cost accounting
- 3.8 Helping in determination of cost:
- 3.9 Helps in inventory control:
- 3.10 Helps in measurement of efficiency:
- 4 LIMITATIONS OF COST ACCOUNTING
- 5 BOTTOM LINE
Accounting is a broad concept. It mainly concerns three branches. The three major branches of accounting are Financial Accounting, cost accounting and management accounting. Cost accounting is one of the branches of accounting.
The subject has been developed to mitigate the limitation financial accounting originally had. Financial accounting is developed to communicate economic information of an organization as a whole. And, that is used for external reporting purpose.
The reporting of financial accounting has its limitation when it comes to internal reporting i.e for the formulation of policy and strategy, decision making and control.
So, what’s cost accounting? What does it do? 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.
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.
- Objective: The main objectives of cost accounting are to accrue costs of process, unit, output, job, and department and report them for different uses.
- 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.
- Basis: Cost accounting sets the base for a cost estimate, cost control, and price determination of output.
- Usefulness: Cost accounting helps accountants make a decision and evaluate performance as it uses absorption or valuation costing technique. This is useful in preparing income statements.
Objectives of Cost Accounting: Brief Discussion
There can be several objectives of cost accounting. However, the following are its most important objectives:
To determine cost:
The cost of a product or services or jobs 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 cost may be applied according to the different in the nature of activity of 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,
- Whether to accept or reject the offer related to accounting
- Decision related to manufacturing or purchasing a product
- Whether to reuse or replace the existing machine and
- 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:
Total cost and total revenue of every product or services is 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 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 in measurement of competence of operations through organization if standards and diverse analysis.
Helps in preparation of budget:
It helps in preparation of various budgets such as sales budget, production budget, material purchase budget, flexible budget etc.
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 application of any costing system.
Expensive: The installation of cost accounting system requires additional cost. 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: Twwo equally competent cost accounts may arrive at different result from the same information.
Fiscal transaction requires proper recording. Systematic classification and analysis of accountants can be achieved with application of accounting branches. Cost accountant helps you know profit or loss and financial position with financial transaction.