Cost accounting Importance and advantages of cost accounting

what is Cost accounting?
Cost accounting Importance and advantages of cost accounting

Concepts of cost accounting

Cost accounting is a branch of accounting that has evolved to overcome the limitations of financial accounting. It is the process of accounting for cost, which is concerned more with the ascertainment, allocation, distribution and accounting aspects of cost. It is that branch of accounting, which deals with the classification, recording, allocation, summation and reporting of current and prospective costs. Actually, it is the formal mechanism by means of which of products and services are ascertained and controlled.

It is an internal reporting systems that aims to assist the management for planning and decision-making it primary emphasizes on cost and deals with collection, analysis, interpretation and prospective for managerial decision making on various business problems.

Cost accounting is more concerned with short-tem planning and its reporting period is much losses that financial accounting. It deals with historic data but is also futuristic in approach. Cost accounting systems cannot be installed without proper financial accounting systems. Each organization can develop a costing systems best suited to its individual needs. In financial accounting the major emphasis is in cost classification based on types of transaction e.g., salaries, repairs, insurance, stores etc. but in cost accounting, the emphasis is laid on functions, activities, processes and on internal planning and control and  information needs of the organization.

Similarly, according to national association of accountants USA' 

From the above information definition, it can be concluded that cost accounting is accounting for cost aimed at providing cost data, statements and reports for the purposes to assists the managements in planning decision making and controlling.

Objective and function of cost accounting

The main objective and function of cost accounting are mentioned below:

1. To ascertain cost: the main objective of cost accounting is to ascertain the cost of goods and services. The expenses that are incurred while producing goods or rendering services are called costs. Some examples of costs are material, labor and other direct and indirect expenses. Under cost accounting, cost are collected, classified and analyzed with the aim of finding out the total as well as per unit cost of goods, services, processes, contract etc.

2. To analyses cost and loss: another objective of cost accounting is to analyze the cost of each activity. The analysis of cost is necessary to classify the cost into controllable or uncontrollable, relevant or irreverent, profitable or unprofitable etc. similarly, under cost accounting the effects of material, idle time, breakdown or damage of machine on the cost is also analyzed.

3. To control cost: cost control is a technique that is used to minimize the cost of product and services without compromising on the quality. Cost accounting aims at controlling the cost by using various techniques, such as standard costing and budgetary control.

4. To help in fixation of selling price: another important objective of cost accounting is to help in fixation of selling prices. The costs are accumulated, classified and analyzed to ascertain cost per unit. The selling price per unit is calculated by adding a certain profit on the cost per units. Under cost accounting, different techniques such as job costing, batch costing, output costing services costing etc are used for determine the selling price.

5. To aid the management: cost accounting aims at assisting the management in planning and  its importations by providing necessary costing information that also enable the evaluation of the past activities as well as future planning.

Importance and advantages of cost accounting

The importance and advance of cost accounting are presented below:

1. Helps in controlling cost: cost accounting helps in controlling cost by applying some techniques such as standard costing and budgetary control.

2. Provides necessary cost information: it provides necessary cost information to the management for planning, implements and controlling.

3. Ascertains the total per unit cost of production: it ascertains the total and per unit cost of production of goods and services that helps to fix the selling prices as well.

4. Introduces cost reduction programs: it helps to introduce and implement different cost reduction programs.

5. Discloses the profitable and non profitable activities: it discloses the profitable and non profitable activities that enable management to decide to eliminate or control unprofitable activities and expand or develop the profitable activities.

6. Provides information for the comparison of cost: it provides reliable data and information which enable the comparison of cost between periods, volume of output, determent and processes.

7. Checks the accuracy of financial accounts: it helps checking the accuracy of financial accounts. This is done by preparing cost reconciliation statement.

8. Helps invests and financial institutions: it is also advantageous to investment and financial institutions since it discloses the profitability and financial position in which they intend to invest.

9. Beneficial to workers: it is beneficial to workers as well since it emphasizes the efficient utilization of labor and scientific systems of wages payment.

Differences between financial and cost accounting

Limitations of cost accounting

Besides a number of advantages, cost accounting sufferers from a number of limitations. Some of them are mentioned below:

1. Lack of uniformity: cost accounting lacks a uniform procedure. It is possible that two equally competent cost accountants may arrive at different results from the same information. Keeping this limitation in view, all cost accounting results can be as mere estimates.

2. Conceptual diversity: there are a large number of conventions and flexible factors such as classification of cost into its elements, issue materials on average or standards price, apportionment of overhead expenses, arbitrary allocation of joint costs, division of overhead into fixed and various and variable costs, division of cost into normal and abnormal and controllable and non-controllable and adoption of marginal and standard costs due to which it becomes difficult to have exact costs. In which a contacts, the reliable of cost accounting might be low.

3. Costly: there are many formalities which are to be observed by a small and medium size concerned due to which the establishment and running costs are so much that it becomes difficult for their concerned to afford us cost. Thus it can be used only by big concerned.

4. Ignorance of futuristic situation: the contribution of cost accounting for heading futures situation has not been much for example, it is has not evolved so far any tool for heading inflation situation.

5. Lack of double entry systems: under cost accounting. A double entry system is not adopted that does not enable to checks the arithmetic's accuracy of the transaction and locate the errors.

6. Developing stage: cost accounting is to development stage since its principle concepts and conversions are not fully developed.

Cost accounting vs. cost accountancy

The term cost accountancy is wider that the term cost accounting. According to the terminology of management and financial accountancy published by the chartered institute of management accounts (CIMA), London, cost accounting means, "the application of costing and cost accounting principle of methods and techniques to the science of art and practices of cost control. It include the prostration of information derived there form for the purpose of management decision-making." Cost accounting is thus the science art and particle of cost accountants. It is a science because it consist of organized or systematic knowledge, which a cost accountant's knowledge should not remain restricted only to such subjects which cost accountancy embraces but it should extended to such  subjects which cost economics, production control, operations research which will help him in application of his cost accountancy knowledge to the problems of the business.

Cost accountancy is also an art because it involves costing technique and methods, such as those of different costing, and standard costing etc. the application of these techniques helps the cost accountants in deciding how to control costs, whether to go for replacement of the existing plants by a new one or not etc.

Cost accounting is also the particle of cost account's because he has to make constants efforts in the field of cost accountancy. He has to Endeavor constantly for reducing cost, present cost data in a condensed but information way to the managements so that managements may take proper actions at the opportune time.

Cost accounting comprises of several areas. They are as follows:

1. Cost accounting: cost accounting is the process of accounting for costs. It embraces the accounting procedures relating to recording of all incomes and expenditures and the preparation of periodical statements and reports with the object of ascertaining and controlling costs. It is thus the formal mechanism by means of means of which costs of productions or services are ascertained and controlled.

2. Costing: according to CIMA, London, "costing is the techniques and process of ascertaining cost." Cost accounting is different from costing in the sense that the former provides only the basis and information f or ascertainment of costs. Once the information is made available, the costing can be carried out ascertainment of costs. Once the information is made available, the costing can be carried out arithmetically, by means of memorandum statements or by methods of integrals accounting.

Wheldon has given an exhaustive definition of costing after expanding the ides contained in the definitions of the terms, "costing" and 'costing accounting'. According to him costing is "the classification recording and appropriate allocation of expenditures for the determination of the costs of products or services the relation of these costs to sales values and the ascertainments of profitability.

3. Cost control: a cost accountants now is not only concerned with the ascertainment of cost and fixing selling prices of the  products but also with furnishing such information as to enable the management to control the operating costs of the business. As a matter of facts, the latter function has become the prime function of the cost accounts of these days.

According to the institute of cost works accounting of India, cost control means. " the act of power of controlling or regarding or dominating or controlling costs through the application of management tools and techniques to the performance of any operation to more predetermined objectives of quality, quantity, values and time at an options outlay."

Cost control is exercised by a verity of techniques such as those costing, budgetary control and quality control etc. submission of periodical reports by the cost according also helps managements in exercising better control over costs. For example, a statement of value of stocks raw materials, finished goods any work-in-progress on hand together with relevant rations will show whether there is any trenchancy of over or under-stocking.

4. Cost reduction: this is a new dimension to the function of cost accountants. In this era of liberalization and competition only these will service who can deliver quality goods and services at least cost. Thus, it needs constant research and developments in the areas of product design production procedures etc.

5. Cost audit: according to CIMA, London "cost audit is the verification of cost accounts and check on the adherence to the cost accounting plan."Thus, cost audit involves checking up the arithmetical accuracy of cost accounts and verification whether the principle laid down has been followed or not. It because essential in cost of a business where cost according is carried out on a large scale.

Read More....

1. Management accounting
2. Cost accounting
3. FINANCIAL ACCOUNTING
4. Cost concept and classification
5. Accounting error and their rectification
6. Financial statement analysis
7. Subsidiary Books Account
8. balance sheet
9. Final account of a company
10. accounting worksheet
11. Bank Reconciliation Statement
12. FORFEITURE AND RE-ISSUE OF SHARES 
13. Share Capital Accounting
14. account company
15. Accounting Reserve and Provisions 
16. Depreciation for Accounting
17. profit and loss account 
18. Capital and revenue Account
19. Journal Accounting
20. Trial Balance Accounting
21. Petty Cash Book
22. Cash and Bank Transaction
23. Ledger Account
24. Journal Entry Accounting
25. Accounting Equation
26. Double Entry Book Keeping System
27. accounting term used Account
28. Accounting Meaning
29. Accounting- in information system
30. Statement of expenditure report
31. Petty cash fund
32. Bank cash book/cash bank book
33. Journal voucher
34. Budget heads for the fiscal year
35. budget head expenditure
36. New accounting system
37. Government accounting
38. Accounting for incomplete records (single entry system)
39. Accounting for non- trading concern
40. Cost reconciliation statement
41. Unit or output costing
42. Accounting for overheads
43. Payroll sheet
44.  Accounting for labor
45. Inventory Management
47. Issue of materials
48. Store keeping
49. Accounting for materials
50. Cost classification
51. Cash flow statement
52. Funds flow statement
53. Accounting Ratio analysis
54. Accounting for Debentures  
55. ISSUE OF SHARES OTHER THAN CASH
56. ISSUE OF SHARE FOR CASH
57. Final Account 
58. Accounting for labour