Cost accounting

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Cost accounting

  1. 1.  “Cost accounting is the process of recording, classifying, allocating and reporting the various costs incurred in the operation of an enterprise”. In simple words costing is a systematic procedure for determining the unit cost of output produced or service rendered.
  2. 2.  It is not sufficient for management to know that the cost of shirt is Rs. 15. The management is also interested in knowing the amount spent for cloth in shirt, the amount of labor and other expenses so that it can control and reduce its cost.
  3. 3.  Managerial accounting is concerned with providing information to managers that is people inside an organization who direct and control its operations. In contrast, financial accounting is concerned with providing information to stockholders, creditors and others who are outside an organization.
  4. 4.  Managerial accounting provides the essential data that are needed to run organizations. Financial accounting provides the essential data that are used by outsiders to judge a company’s past financial performance.
  5. 5. The main objectives of costing are1) To ascertain the cost of products/services2) To determine selling price3) To control cost4) To provide guidelines for management policy
  6. 6. Costing system has following advantages.1) Profitable and unprofitable activities are disclosed.2) Costing provides such information upon which estimates and tenders may be based.3) The exact cause of a decrease or an increase in the profit or loss of business can be located.4) Costing guides future production policies5) It helps in controlling the cost with the application of standard costing and budgetary control. Cost comparison also helps in cost control.
  7. 7.  The function of accounting is to provide the financial information for different parties who are interested. Both financial and cost accounting are concerned with the accumulation and presentation of information to serve the needs of management and outsiders. The source of two accounts for recording the transactions is the same. Cost accounting is based on the same principles regarding the debit and credit as are applied in financial accounting. Both are in monetary terms. Both differ in their purpose and scope.
  8. 8. PURPOSE: Cost accounting renders information for the guidance of the management for planning, operation, control and decision making.FORMS AND ACCOUNTS: Financial accounting must follow GAAP but cost accounts on the other hand, are voluntarily kept to serve the management in the discharge of its functions. Recently the companies act has made obligatory the keeping of costing records in some manufacturing companies.
  9. 9.  CONTROL: Financial accounting lays emphasis on the recording aspect, no consideration is given to control aspect . Cost accounting provides a detailed system of control with the help of standard costing and budgetary control.
  10. 10.  Cost accounting is effective tool for management. Management accounting is also designed to serve the needs of management in the performance of its functions. The ICMA defines management accounting as the presentation of accounting information is such a way so as to assist management in the creation of policy and in day to day operation of an undertaking. Thus management accounting aims at reporting to management for planning, decision making, controlling and other managerial function.
  11. 11.  Objectives of cost accounting are quite similar to those of management accounting. In fact cost management accounting is an extension of cost accounting. For example: cost accountant reports to management the variances from standard or budgeted cost and presents a comparative data of various periods. The management accountant on the other hand goes a step further to suggest ways and means to improve upon the operations on the basis of available data of variance. In case material cost is more, the management accountant would work out the prospects of controlling the material cost and bring it to the level of standard material cost.
  12. 12.  Financial accounting prepare income statement and balance sheet Cost accounting analyzing cost for control and maximizing efficiency Management assisting management accounting for planning, decision making and control.

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