What is Cost Accounting?

Definition of Cost Accounting

ICMA defines cost accounting as ” the application of accounting and costing principles, methods and techniques in the ascertainment of cost and analysis of saving and or excess as compared with previous experience or with standards”.

Cost accounting is a process of collecting, recording, classifying, analyzing, summarizing, allocating, and evaluating various alternative courses of action & control of costs. Its goal is to advise the management on the most appropriate course of action based on cost efficiency and capability. Cost accounting provides detailed cost information that management needs to control current operations and plan for the future.

Costing: The techniques and process of ascertaining costs are known as cost. The technique in costing consists of principles and rules governing the procedure of ascertaining the cost of products or services.

costing is the classifying, recording, and appropriate allocation of expenditure for the determination of the costs of products or services._Wheldon.

Cost Accounting

Objectives of Cost Accounting

  1. Ascertain the cost per unit of the different products manufactured by a business concern;
  2. Provide a correct analysis of cost both by processor operations and by different elements of cost;
  3. To disclose sources of wastage whether of material, time, or expense or in the use of machinery, equipment, and tools and to prepare such reports which may be necessary to control such wastage;
  4. To provide requisite data and serve as a guide for fixing prices of products manufactured or services rendered;
  5. Ascertain the profitability of each of the products and advise management as to how these profits can be maximized;
  6. To exercise effective control of stocks of raw materials, work-in-progress, consumable stores, and finished goods to minimize the capital locked up in these stocks;
  7. To reveal sources of the economy by installing and implementing a system of cost control for materials, labor, and overheads;
  8. Advise management on future expansion policies and proposed capital projects;
  9. To present and interpret data for management planning, evaluation of performance, and control;
  10. help in the preparation of budgets and implementation of budgetary control;
  11. To organize an effective information system so that different levels of management may get the required information at the right time in the right form for carrying out their individual responsibilities in an efficient manner;
  12. To guide management in the formulation and implementation of incentive bonus plans based on productivity and cost savings.

Advantages

  1. Elimination of Wastes, Losses, and Inefficiencies: A good cost accounting system eliminates wastes, losses, and inefficiencies by fixing standards for everything.
  2. Cost Reduction: New and improved methods of production are followed under the cost accounting system. It leads to cost reduction.
  3. Identify the reasons for Profit or Loss: A good cost accounting system highlights the reasons for increasing or decreasing profit. If so, the management can take remedial action to maintain the profitability of the concern. There is no possibility of shutting down any product or process or department.
  4. Advises on Make or Buy Decision: Based on cost information, the management can decide whether to make or buy a product in the open market. The management can rightly choose the best out of many alternatives. Sometimes, spare capacity can be used profitably.
  5. Price Fixation: The total cost of a product is available in the costing records. It is highly useful for the price fixation of a product.
  6. Cost Control: Budgets are prepared and standards are fixed under the cost accounting system. The expenses are not permitted beyond the budget amount. The actual performance is compared with the standard to find the variation. If there is any variation, reasons find out and the management can exercise control. Period to period cost comparison also helps cost control.