Meaning of Cost Accounting
Cost Accounting is a branch of accounting concerned with recording and analysing the cost elements of the organisation. It records each element of 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 organisation.
Cost accounting is considered as the subpart of managerial accounting and helps the managers in better management of organisation. It supplies all detailed information concerned with production cost to managers so that important decision regarding controlling cost can be taken. The information collected by cost accounting is not available for external users but is only used by internal users for management purpose.
Cost Accounting has an important role in improving cost efficiency of 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 which are essential for successful functioning of business.
The functions of cost accounting are discussed below:
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 manufactures a wide and large range of products, in absence of cost accounting, it becomes difficult for them to find out the real cost of their products.
Cost accounting helps the organisation in controlling their cost. Organisation set standards for their cost which are treated best for achievement of goals and objectives. Cost accounting supplies detailed information related to 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 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 analyse the detailed cost information supplied by cost accounting and accordingly take decisions. They framed and implement policies in the organisation as per information collected. It helps them in taking strategic decisions and better management of organisation affairs.
Setting up selling prices
Fixing up the right selling price for its product is a challenging task for every business organisation. Cost accounting helps in ascertainment of accurate cost of production of product. 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 items 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 occurrence of losses for the organisation.
Measurement of efficiency
Cost accounting helps in measuring the efficiency of the business operations. Managers can easily acquire information regarding production cost which can be analysed to find out how efficiently a business is running. It helps in avoiding wastage of different resources of the organisation 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 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.
Search an Article