2. Define Cost accounting? Explain the advantages and limitations of cost accounting ?

Accounting is a very old science which aims at keeping records of various transactions. The accounting is considered to be essential for keeping records of all receipts and payments as well as that of the income and expenditures. Accounting can be broadly divided into three categories.

Financial Accounting, aims at finding out profi t or losses of an accounting year as well as the assets and liabilities position, by recording various transactions in a systematic manner.

Cost Accounting helps the business to ascertain the cost of production/services offered by the organization and also provides valuable information for taking various decisions and also for cost control and cost reduction.

Management Accounting helps the management to conduct the business in a more efficient manner.

As compared to the financial accounting, the focus of cost accounting is different. In the modern days of cut throat competition, any business organization has to pay attention towards their cost of production.

Computation of cost on scientific basis and thereafter cost control and cost reduction has become of paramount importance. Hence it has become essential to study the basic principles and concepts of cost accounting. These are discussed in the subsequent paragraphs.

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.

Cost :- Cost can be defined as the expenditure (actual or notional) incurred on or attributable to a given thing. It can also be described as the resources that have been sacrificed or must be sacrificed to attain a particular objective. In other words, cost is the amount of resources used for something which must be measured in terms of money. For example – Cost of preparing one cup of tea is the amount incurred on the elements like material, labor and other expenses, similarly cost of offering any services like banking is the amount of expenditure for offering that service.

Thus cost of production or cost of service can be calculated by ascertaining the resources used for the production or services.

Costing :- Costing may be defined as ‘the technique and process of ascertaining costs’. According to Wheldon, ‘Costing is classifying, recording, allocation and appropriation of expenses for the determination of cost of products or services and for the presentation of suitably arranged data for the purpose of control and guidance of management. It includes the ascertainment of every order, job, contract, process, service units as may be appropriate. It deals with the cost of production, selling and distribution.

If we analyze the above definitions, it will be understood that costing is basically the procedure of ascertaining the costs. As mentioned above, for any business organization, ascertaining of costs is must and for this purpose a scientific procedure should be followed. ‘Costing’ is precisely this procedure which helps them to find out the costs of products or services.

Cost Accounting :- Cost Accounting primarily deals with collection, analysis of relevant of cost data for interpretation and presentation for various problems of management. Cost accounting accounts for the cost of products, service or an operation. It is defined as, ‘the establishment of budgets, standard costs and actual costs of operations, processes, activities or products and the analysis of variances, profitability or the social use of funds’.

Cost Accountancy :- Cost Accountancy is a broader term and is defined as, ‘the application of costing and cost accounting principles, methods and techniques to the science and art and practice of cost control and the ascertainment of profitability as well as presentation of information for the purpose of managerial decision making.’

If we analyze the above definition, the following points will emerge,

A. Cost accounting is basically application of the costing and cost accounting principles.

B. This application is with specific purpose and that is for the purpose of cost control, ascertainment of profitability and also for presentation of information to facilitate decision making.

C. Cost accounting is a combination of art and science, it is a science as it has well defined rules and regulations, it is an art as application of any science requires art and it is a practice as it has to be applied on continuous basis and is not a one time exercise.

Moreover, the management at the maximum should accept the advises given by the cost accounting system. If so, the following advantages may be available to an organization.

Advantages of Cost Accounting

The extent of advantages derived from the cost accounting is based on the type, adequacy and efficiency of cost accounting system installation.

Moreover, the management at the maximum should accept the advises given by the cost accounting system. If so, the following advantages may be available to an organization.

1. Elimination of Wastes, Losses and Inefficiencies: A good cost accounting system eliminates wastes, losses and inefficiencies by fixing standard for everything.

2. Cost Reduction: New and improved methods of production are followed under 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 profitability of the concern. There is no possibility of shutting down of any product or process or department.

4. Advises on Make or Buy Decision: On the basis of cost information, the management can decide whether make or buy a product in 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 price fixation of a product.

6. Cost Control: Budgets are prepared and standards are fixed under cost accounting system. The expenses are not permitted beyond the budget amount. The actual performance is compared with standard to find the variation. If there is any variation, reasons are find out and the management can exercise control. Period to period cost comparison also helps cost control.

7. Assist the Government: Government can collect reasonable tax from the company and exercise price control.

8. Help the Trade Union: Bonus calculation is very easy to the trade union. Reasonable remuneration is also fixed on the basis of cost accounting information.

9. Marginal Analysis of Cost: It is done for facilitating the short-term decisions especially during depression period.

10. Fixation of Responsibility: Responsibility centers is fixed under cost accounting system. If responsibility is fixed, it becomes difficult to evade responsibility of performance and leads to effective performance.

11. Helps to Prepare Financial Accounts: The information like value of closing materials, work in progress and finished goods are necessary to prepare financial accounts. This information is supplied by the costing records and helps to prepare financial accounts without any further delay.

12. Prevention of Frauds: Introducing cost audit can prevent frauds. If so, correct and reliable data was available from the costing records which are highly useful to the government, share holders, the creditors and the like.

Disadvantages or Limitations of Cost Accounting

The limitations or disadvantages of cost accounting are listed below:

1. Only past performances are available in the costing records but the management is taking decision for future.

2. The cost of previous year is not same in the succeeding year. Hence, cost data are not highly useful.

3. The cost is ascertained on the basis of full utilization of capacity. If capacity is partly utilized, the cost may not be true.

4. Financial character expenses are not included for cost calculation. Hence, the calculated cost is not correct always.

5. In cost accounting, costs are absorbed on pre-determined rate. It leads to over absorption or under absorption of overheads.

6. Cost Accounting fails to solve the problems relating to work study, time and motion study and operation research.

7. Installation of Cost Accounting System requires the maintenance of many costing records. If results in heavy expenditure.

8. Delay in receiving costing information does not result in taking quality decision by the management.

9. Rigid Cost Accounting System does not serve all purposes.