Introduction to Cost Accounting
Cost Accounting is one of the branches of the accounting. It has been developed due to the short comings or
limitations of the financial accounting. Cost Accounting was developed to serve
various purpose of the management.
Cost & Costing
The Chartered Institute of Management
Accountants, London has defined Cost as “The amount of expenditure (actual or
notional) incurred on or attributable to
specified thing or activity”.”
In the words of Anthony and Welsh Cost can be defined as “Cost is
the measurement in monetary terms of account of resources used for some
purpose.”
In the words of Institute of Cost and
Management Accountants London defined costing as “Costing is a technique and
process used to ascertainment the cost.”
Thus in general words cost refers to
the expenditure incurred in order to produce goods or service and gain an economic
benefit from the activity while costing is the technique and process of assess
the cost in an activity.
Cost Accounting
Chartered Institute of Management
Accountants, London defined Cost Accounting as “The establishment of budgets,
standards costs and actual costs of operations, processes, activities or
products and the analysis of variances, profitability or the social use of
funds.”
In the words of Wheldon Cost Accounting is defined as “The
classifying, recording and appropriate allocation of expenditure for
determination of costs of products or service and presentation of suitably
arranged data for the purpose of control and guidance of management.”
Thus in general words we can say that cost accounting is process
which begins with the recording of the cost and ends with the preparation of
the statistical data for the cost finding, cost control, ascertainment of
profitability and internal reporting so that better managerial decisions can be
made.
Objectives of Cost Accounting
Now that we have understood what is cost, costing and cost
accounting meaning let us try to understand the objectives of cost accounting
§ To assess the actual cost per unit of each product or service
produced by the firm or organization.
§ To analyze and classify all the expenditures based on the cost of
product and service.
§ To disclose the wastage of resources, reasons of wastage and
preventive measures taken to reduce the wastage of resources.
§ Computation of the profit and loss made on each product,
department, process carried out by matching the costs with the revenues.
§ To help in correct pricing of products and services by providing cost
data.
§ To provide data for inventory valuation.
§ To setup perpetual inventory system.
§ To provide necessary data for the presentation of financial
statements at regular intervals to disclose the trends in the operating
efficiencies.
§ To compare the cost of operations over the period of time.
§ To provide information to management for the short term decisions
like quotations for special customers, make or buy decision or assigning
priorities to various products.
§ To achieve the operational efficiencies.
Scope of Cost Accounting
The
scope of cost accounting include
§ Cost Assessment
§ Control of Cost
§ Matching of Cost with Revenue
§ Help Management in decision making
Now let us try to understand each one below,
§ Cost Assessment:
The most important function
of cost accounting is cost ascertainment or assessment. It includes collection,
analysis of expenses and measurement of production at various stages of
manufacture. Cost Assessment can be done in two ways namely – post costing and continuous
costing.
§ Control of Cost:
One of the most important objectives
of all the businesses is to achieve the operational efficiencies so that money
can be utilized to maximum possible extent and result in more profit.
§ Matching of Cost with Revenue:
The manager has to prepare
monthly, quarterly statements reflecting the cost and income data generated
from sale in a specific period.
§ Help Management in Decision Making:
Management will strive to
make better decisions from the alternatives. Thus while evaluating alternatives
cost analysis is helpful for the management to make informed decisions. Thus for
a better informed decision a good cost accounting system is required.
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