Define Cost accounting? Explain the scope objectives and importance of cost ?

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 profit 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 defi ned 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.

Scope of Cost Accounting

The terms ‘costing’ and ‘cost accounting’ are many times used interchangeably. However, the scope of cost accounting is broader than that of costing. Following functional activities are included in the scope of cost accounting:

1. Cost book-keeping: It involves maintaining complete record of all costs incurred from their incurrence to their charge to departments, products and services. Such recording is preferably done on the basis of double entry system.

2. Cost system: Systems and procedures are devised for proper accounting for costs.

3. Cost ascertainment: Ascertaining cost of products, processes, jobs,services, etc., is the important function of cost accounting. Cost ascertainment becomes the basis of managerial decision making such as pricing, planning and control.

4. Cost Analysis: It involves the process of finding out the causal factors of actual costs varying from the budgeted costs and fixation of responsibility for cost increases.

5. Cost comparisons: Cost accounting also includes comparisons between cost from alternative courses of action such as use of technology for production, cost of making different products and activities, and cost of same product/ service over a period of time.

 6. Cost Control: Cost accounting is the utilisation of cost information for exercising control. It involves a detailed examination of each cost in the light of benefit derived from the incurrence of the cost. Thus, we can state that cost is analysed to know whether the current level of costs is satisfactory in the light of standards set in advance.

7. Cost Reports: Presentation of cost is the ultimate function of cost accounting. These reports are primarily for use by the management at different levels. Cost Reports form the basis for planning and control, performance appraisal and managerial decision making.

Objectives and Functions of Cost Accounting:

1. To ascertain the cost per unit of the different products manufactured by a business concern.

2. To provide a correct analysis of cost both by process or 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. To ascertain the profitability of each of the products and advise management as to how these profits can be maximised.

6. To exercise effective control if stocks of raw materials, work-in-progress, consumable stores and finished goods in order to minimise the capital locked up in these stocks.

7. To reveal sources of economy by installing and implementing a system of cost control for materials, labour and overheads.

8. To 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. To help in the preparation of budgets and implementation of budgetary control.

11. To organise an effective information system so that different levels of management may get the required information at the right time in 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.

13. To supply useful data to management for taking various financial decisions such as introduction of new products, replacement of labour by machine etc.

14. To help in supervising the working of punched card accounting or data processing through computers.

15. To organise the internal audit system to ensure effective working of different departments

IMPORTANCE OF COST ACCOUNTING

1.  Costing helps in periods of trade depression and trade competition:-

In periods of trade depression the business cannot afford to have leakages which pass unchecked.  The management should know where economies may be sought, waste eliminated and efficiency increased.   The business has to wage a wax for its survival.  The management should know the actual cost of their products before embarking on any scheme of reducing the prices on giving tenders.  Adequate costing facilitates this.

2.  Aids in price fixation:-

     Though economic law & supply and demand and activities of the competitors, to a great extent, determine the price of the article, cost to the producer does play an important part. The producer can take necessary guidance from his costing records.

3.   Helps in estimate:-

      Adequate costing records provide a reliable basis upon which tenders and estimates may be prepared.  The chances of losing a contract on account of over – rating or losing in the execution of a contract due to under – rating can be minimized.  Thus, “ascertained costs provide a measure for estimates, a guide to policy, and a control over current production”.

4.   Helps in channeling production on right lines:-

      Costing makes possible for the management to distinguish between profitable and non-profitable activities profit can be maximized by concentrating on profitable operations and eliminating non-profitable ones.

5.   Wastages are eliminated:-

      As it is possible to know the cost of the article at every stage, it becomes possible to chock various forms of waste, such as time, expenses etc. or in the use of machine, equipment and tools.

6.   Costing makes comparison possible:-

      If the costing records are regularly kept, comparative cost data for different periods and various volumes of production will be available.  It will help the management in forming future lines of action.

7.   Provides data for periodical profit and loss accounts:-

      Adequate costing records supply to the management such data as may be necessary for preparation of profit and loss account and balance sheet, at such intervals as may be desired by the management.

      It also explains in detail the sources of profit or loss revealed by the financial accounts thus helps in presentation of better information before the management.

8.   Aids in determining and enhancing efficiency:-

      Losses due to wastage of material, idle time of workers, poor supervision etc., will be disclosed if the various operations involved in manufacturing a product are studied by a cost accountant. The efficiency can be measured and costs controlled and through it various devices can be framed to increase the efficiency.

9.   Helps in inventory control:-

      Costing furnishes control which management requires in respect of stock of materials, work-in-progress and finished goods. (This has been explained in detail under the chapter “Materials”)

10. Helps in cost reduction:-

      Costs can be reduced in the long run when alternatives are tried.  This is particularly important ion the present day context of global competition cost accounting has assumed special significance beyond cost control this way.

11. Assists in increasing productivity

      Productivity of material and labour is required to be increased to have growth and more profitability in the organisation costing renders great assistance in measuring productivity and suggesting ways to improve it.