Definition: “ Cost Accounting is the process of accounting for costs from the point at which expenditure is incurred or committed to the establishment of its ultimate relationship with cost centres and cost units. In it’s widest usage, it embraces the preparation of statistical data, the application of cost control methods and ascertainment of profitability of activities carried out or planned”. - CIMA (UK)
1) Reveals Profitable and Unprofitable Activities: On this information management may take steps to reduce or eliminate wastages and inefficiencies. Occurring in any form such as Idle Time, Under utilization of plant capacity, spoilage of materials etc.2) Helps in Cost Control: Using special techniques like Standard Costing and Budgetary Control .
3) Helps in Decision Making: Supplies cost data and other related information for managerial decision-making. Such as , i. Introduction of a new product line. ii. Determining export price of products. iii. Make or buy etc.4) Helps in Inventory Control: Perpetual Inventory System( which is an integral part of Cost Accounting) – Helps in the preparation of interim Profit and Loss. Other Techniques like ABC Analysis, Level setting etc are also used in Cost Accounting.
5) Helps in Cost Reduction: Helps in introduction of a cost reduction programme. Find out new and improved ways to reduce cost.6) Aids in formulating policies: Costing provides such information to management that enables them to , i. Formulate production and pricing policies. ii. Preparing estimates of contracts and tenders.
The limitation of financial accounting has made the management to realise the importance of cost accounting. The importance of cost accounting are as follows: Importance to Management:1) Helps in ascertainment of cost: Ascertainment of cost of process, product, Job, contract, activity, etc., by using different techniques such as Job costing and Process costing.
2) Aids in Price Fixation: Demand and supply, activities of competitors, market condition play an important role in determining the price of product and cost to the producer. The producer can take necessary help from his costing records.3) Helps in Cost reduction: Cost can be reduced in the long-run when cost reduction programme and improved methods are tried to reduce costs.
4) Elimination of wastage: As it is possible to know the cost of product at every stage, it becomes possible to check the forms of waste such as time, expenses, material etc .5) Helps in identifying unprofitable activities: With the help of cost accounting the unprofitable activities are identified, so that the necessary correct action may be taken.
6) Helps in checking the accuracy of financial account: Cost accounting helps in checking the accuracy of financial account With the help of reconciliation of the profit as per financial accounts with the profit as per cost account.7) Helps in fixing selling Prices: It helps the management in fixing selling prices of product by providing detailed cost information.
Importance to Workers: An efficient costing system benefits employees through incentives plan in their enterprise, etc. As a result both the productivity and earning capacity increases. Importance to Creditors: Suppliers, investor’s financial institution and other moneylenders have a stake in the success of the business concern and therefore are benefited by installation of an efficient costing system.