Meaning of Cost Accounting
Cost Accounting is a branch of accounting concerned with recording and analyzing the cost elements of the organization. It records each element of the company’s total cost of production including fixed cost and several variable costs involved in various stages of production. All cost elements are recorded, summarized and presented in a better way for proper understanding by the internal users of the organization.
Cost accounting is considered as the subpart of managerial accounting and helps the managers in better management of the organisation. It supplies all detailed information concerned with production cost to managers so that important decision regarding controlling costs can be taken. The information collected by cost accounting is not available for external users but is only used by internal users for management purposes.
Cost Accounting has an important role in improving the cost-efficiency of the organisation by taking strategic decisions. Cost accounting is of different types: Standard cost accounting, Marginal accounting, activity-based accounting, and lean accounting. It performs a wide range of functions that are essential for the successful functioning of the business. The scope and functions of cost accounting are discussed below:
Scope of Cost Accounting
Ascertainment of cost
Cost Accounting deals with the Ascertainment of cost. it gives a true and fair view of the actual cost involved in the different processes in the organization. Managers have detail information regarding cost and easily regulate the control as per the budget this helps in true ascertainment of the cost.
Provides a Basis for future
Cost Accounting collects detail information regarding the cost of different departments of the organization. The manager uses this collected information for predict the actual cost of future operations. This true ascertainment for batter plans to achieve the goals.
The cost account helps in the estimation of the actual cost. Managers can use this information in controlling the cost and ensure that all activities go to a predetermined budget manager can take necessary action to control whenever anything goes out of the budget.
Budgeting and Budgetary Control
Cost accounting has an important role in deciding the budget it collects information regarding cost form different sources within the organization. This information is analyzed by the manager to design the optimum budget. It is insured by the manager that all expenses go within the decided budget and if necessary action being taken to control the cost
Cost Accounting has an important role in performing the audit of different costs. An auditor can easily acquire all relevant information through the data aquire by cost accounting. It makes comparison and verification of various data easy an error can be deducted
Cost accounting provides the data of actual expenditure and income. So we compare the actual cost with the standard cost. To find out the cause of difference and the corrective measures will be taken.
cost accounting provides all information to the manager for effective decision making. The manager analyzes the data acquired by cost accounting and formulate the plan and policies. It helps the manager in better understanding by depicting the true and fair picture of the organization. Manager can take a best suited decision as per the organization need to drive the maximum result
Functions of Cost Accounting
Ascertainment of cost
Cost ascertainment is an important function played by cost accounting. It records each and every element relating to production activity systematically like fixed and variable cost, direct and indirect cost. The data collected by cost accounting is analysed by managers in determining the true and actual cost of products. Nowadays businesses manufacture a wide and large range of products, in the absence of cost accounting, it becomes difficult for them to find out the real cost of their products.
Cost accounting helps the organization in controlling its cost. Organization sets standards for their cost which are treated best for the achievement of goals and objectives. Cost accounting supplies detailed information related to the cost of each step of production. This information collected is then compared with standards already set and if any deviation is found, necessary steps are taken. Therefore it helps in the detection of deviations in cost and time controlling them.
Aid to management
Cost accounting supports the managers in performing their duties. It supplies them all necessary and relevant data to the managers periodically that may be monthly, quarterly or half-yearly. Managers analyze the detailed cost information supplied by cost accounting and accordingly take decisions. They framed and implement policies in the organization as per the information collected. It helps them in taking strategic decisions and better management of organization affairs.
Setting up selling prices
Fixing up the right selling price for its product is a challenging task for every business organization. Cost accounting helps in the ascertainment of the accurate cost of production of products. By adding the profit margin to the real cost company can easily fix the selling cost for its products. Businesses under cost accounting use different techniques like batch costing, job costing, service, and output costing for determining the selling price of its products.
Cost accounting helps in controlling the inventory by recording each item of inventory. It maintains complete records of all raw materials so that timely proper order for raw materials can be made. It avoids all situations like over-ordering and under-ordering of raw materials. Also, the complete record of finished goods is made so that accordingly production process can be regulated. It avoids wastages of resources and the occurrence of losses for the organization.
Measurement of efficiency
Cost accounting helps in measuring the efficiency of business operations. Managers can easily acquire information regarding production cost which can be analyzed to find out how efficiently a business is running. It helps in avoiding wastage of different resources of the organization through proper monitoring. It uses a standard cost method in measuring the efficiency of each process, product and department.
Discloses profitable and non-profitable activities
Cost accounting gives clear details of each activity of business to managers that which one is profitable and which one not. It supplies all detailed information regarding the cost of each product of the business. Managers by comparing the cost of the product with demand in the market can decide whether to continue its production or not. It, therefore, helps in determining profitable and non-profitable activities of business by managers.