Cost Accounting Definition
Cost accounting is the process of determining the cost of a product or service and generating information for controlling the cost of operations to maximize profits through the effective and convenient use of limited resources.
Traditional financial accounting cannot provide all relevant information for the successful management of a modern business. Over the last few decades, cost accounting has developed and made rapid progress as a financial accounting branch. With its development of techniques and procedures, cost accounting is expanding rapidly in the field of application.
Cost accounting is an accounting process for cost classification, analysis, interpretation, and control. Accordingly, it is an accounting system that provides information on the cost determination and management of products or services. It measures the company’s operating performance.
Costing includes cost assessment techniques and processes. The ”technique” refers to principles applied to the cost of products, jobs, processes, and services for effective learning. The ”process refers to the daily routine of cost determination within the costing method adopted by business enterprises.
Costing includes classifying, recording, and allocating expenditure appropriately to determine the cost of products or services—the relation of these costs to the value of sales and profitability determination.
Objectives of Cost accounting
There is a relationship between management information needs, cost accounting goals, and techniques and tools used in cost accounting for analysis.
The following basic objectives must be served by cost accounting.
1.Ascertainment of Cost
Cost accounting helps to determine the cost of profit or loss of any activity by matching costs with the activity’s revenue on an objective basis.
Those items of expenditure that are directly related to the production of the products are allocated. Then the other costs that are not capable of direct allocation are allocated on an appropriate basis. The cost of the production of manufactured goods is thus determined.
2. Cost Controls
By using various techniques such as budgetary control, standard costing, and inventory control, cost accounting helps to achieve the objective of cost control.
At the beginning of the period, each cost item such as material, labor, and expenditure is budgeted and actual expenses incurred are compared with the budget, which increases the company’s efficiency.
3. Ascertainment of Profitability
Cost accounting helps to achieve the cost of profit or loss for each operation or service of the product process rendered on an objective basis by deducting the cost from the activity’s revenue.
The income statement and balance sheet were also periodically submitted to management.
4. Cost Classification
Cost accounting categorizes costs into various elements, such as materials, labor, and expenses. It has been further split into direct costs and indirect costs for the purpose of cost control.
5. Selling Price Fixation
In deciding the selling price of the product, the total product cost and cost per unit of product are important.
Cost accounting provides data on the cost of making and selling products or services. It is also useful for tender preparation and quotations.
6. Facilitating Preparation of Financial and Other Statements:
Cost accounting helps to generate statements that are generally prepared once a year or half a year to meet the management’s needs.
It is important for management to have a review of the production, sales, and operating outcomes in order to operate the business at high efficiency.
Cost accounting provides daily, weekly or monthly reports of generated units, with analysis of accumulated costs. Instant information on stocks of raw materials, semi-finished and finished goods is provided by the cost accounting system. In the preparation of financial statements, this helps.
You can also read:
- Difference between cost accounting and management accounting
- What is cost accounting cycle? and its steps
- The advantages of cost accounting
- Top 6 Costing Methods
