COST ACCOUNTING

Meaning Definition Elements Objectives Importance Advantages Disadvantages

COST ACCOUNTING

MEANING OF COST ACCOUNTING

Cost accounting is the process of collecting information about the costs incurred by a company's activities, assigning selected costs to products and services and other cost objects, and evaluating the efficiency of cost usage. Cost accounting is mostly concerned with developing an understanding of where a company earns and loses money, and providing input into decisions to generate profits in the future.

• The Institute of Cost and Management Accountants (ICMA) London has defined costing as the ascertainment of costs. This includes the techniques and processes of ascertaining costs.

• The Institute of Cost and Works Accountants of the U.K. has defined cost accountancy as the “application of costing and cost accounting principles, methods and technique to the science, art and practice of cost control and ascertainment of profitability as well as presentation of information for the purpose of managerial decision-making.”

DEFINITION OF COST ACCOUNTING

OBJECTIVE OF COST ACCOUNTING

• Determining selling price

• Controlling cost

• Providing information for decision making

• Ascertaining costing profit

• Facilitating preparation of financial and other statements.

IMPORTANCE OF COST ACCOUNTING

1. TO THE MANAGEMENT

• To determine product costThe cost of the product is very important in cost

accounting. The total product cost and cost per unit of product are important in making stock valuation, deciding price of the product and managerial decision making.

• To facilitate planning and control of regular business activitiesThe cost formulation in cost accounting system is oriented to help in planning, control and decision-making. The accumulation, classification and analysis of cost is done in such a way as to help management decision regarding business activities.

• Elimination of wastageAs it is possible to know the cost of product at every stage, it becomes

possible to check the forms of waste, such as time and expenses are in the use of machine equipment and material.

• Helps in estimateCosting records provide a reliable basis upon which tender and estimate

may be prepared.

• Helps in identifying unprofitable activitiesWith the help of cost accounting the unprofitable activities are identified,

so that the necessary correct action may be taken.

• To supply information for short and long run decisions.Cost accounting system provides data for short and long run decisions of a

non-recurring nature. These decision generally involve high cost commitment

2. THE EMPLOYEES

Worker have an interest to efficient costing systems benefits employees through incentive plan. As a result both productivity and earning capacity increase.

Advantages Of Cost Accounting

•Adequacy or Inadequacy of Selling Prices.•Disclosure of profitable Products.•Control of Material and Supplies.• Maintenance of Proper Investment in Inventories.•Correct Valuation of Inventories.•Whether to Manufacture or Purchase from Outsiders.•Control of Labour Cost.•Use of Company-wide Wage Incentive Plans.•Controllable and Uncontrollable Cost.•Use of Standards for Measuring Efficiency.•Reduction of Losses Due to Seasonal Conditions.•Budgeting.•Reliable Check on General Accounting.

Limitations of Cost accounting

• The system is more complex.• It is expensive.• Inapplicability of costing method and technique.• Not suitable for small scale units.• Lack of Accuracy.• Lacks social Accounting.• Need preparation of frequent reconciliation to verify accuracy.• Duplication of Work.• Use of Secondary Data.• Lack of cooperation of employees.• Does not control Cost by itself.• It is based on estimation and previous data.• It only bring out the cost of goods or services.• It serves the information need of the management.• Not useful for determining the tax liabilities.