Introduction to cost accounting

 

Definition of Cost Accounting 

Cost Accounting : Cost Accounting may be defined as “Accounting for costs classification and analysis of expenditure as will enable the total cost of any particular unit of production to be ascertained with reasonable degree of accuracy and at the same time to disclose exactly how such total cost is constituted”. Thus Cost Accounting is classifying, recording an appropriate allocation of expenditure for the determination of the costs of products or services, and for the presentation of suitably arranged data for the purpose of control and guidance of management. 

Objectives of Cost Accounting

The following are the main objectives of Cost Accounting :-

(a) To ascertain the Costs under different situations using different techniques and systems of costing

(b) To determine the selling prices under different circumstances

(c) To determine and control efficiency by setting standards for Materials, Labour and Overheads

(d) To determine the value of closing inventory for preparing financial statements of the concern

(e) To provide a basis for operating policies which may be determination of Cost Volume relationship, whether to close or operate at a loss, whether to manufacture or buy from market, whether to continue the existing method of production or to replace it by a more improved method of production....etc.

(f) To achieve real and permanent reduction in the unit cost of goods manufactured or services rendered without impairing their suitability for the use intended or diminution in the quality of the product.

Scope of Cost Accountancy

The scope of Cost Accountancy is very wide and includes the following:-

(a) Cost Ascertainment: The main objective of Cost Accounting is to find out the Cost of product / services rendered with reasonable degree of accuracy.

(b) Cost Accounting: It is the process of Accounting for Cost which begins with recording of expenditure and ends with preparation of statistical data.

(c) Analysis of Cost: It is the process of locating the factors responsible for difference in actual cost from the budgeted costs and fixing up of responsibility for differences in cost. It provides better cost management and helps in taking strategic decisions.

(d) Cost Control: It is the process of regulating the action so as to keep the element of cost within the set parameters.

(e) Cost Reports: This is the ultimate function of Cost Accounting. These reports are primarily prepared for use by the management at different levels. Cost reports helps in planning and control, performance appraisal and managerial decision making.

(f) Cost Audit: Cost Audit is the verification of correctness of Cost Accounts and check on the adherence to the Cost Accounting plan. Its purpose is not only to ensure the arithmetic accuracy of cost records but also to see the principles and rules have been applied correctly.