Concept of Cost Accounting & Objectives of Cost Accounting
CS EXECUTIVE CONCEPT OF COST ACCOUNTING
The term Cost is a very common word in our daily lives. More specifically we used it to signify something that we incur to take in back a benefit, maybe goods or services or anything. As we say everything comes at a cost.
Even in accounting, the concept of cost is referred to as the amount that has to be paid or given to get something in return. In other words, the cost is the number of resources either monetary or otherwise, given in exchange for some goods or services.
DEFINITION & CONCEPT OF COST ACCOUNTING
The Chartered Institute of Management Accountants (CIMA), London defines cost as “the amount of expenditure (actual or notional) incurred on or attributable to a specified thing or activity”.
The concept of cost is wide enough to include anything and everything that is put in to derive an output. Say, for instance, the electronic gadget you are using right now to read this article, be it your smartphone, laptop, tablet, or desktop. When I ask how much did it cost, you ought to tell the price at which you bought it, i.e. the sale price which includes the profit margin of the manufacturer or other middlemen.
The costing we are learning is at the other end of this, where the actual cost of manufacturing of the product i.e. your gadget is going to be studied. This production process for the manufacture of a product or rendering of service involves several expenditures namely, materials (all raw materials), labor (the employee benefit expenses), and other expenses (all other utility, maintenance, selling, Administration, etc). Putting all these expenses into the process the firm demands to ascertain the cost all together of the good manufacturing as well as the cost per unit. It is similar in the case of service providers as well.
Commonly, the cost per unit is arrived by dividing the total expenditure incurred by the total units produced, or the quantum of service rendered. So this is what we are going to learn in this article about costing and cost accounting.
Costing is the set of techniques and processes of ascertaining costs. These consist of principles and rules which govern the method of ascertaining the cost of products or services. The main object of costing is to apportion the respective expenditure and allocate it carefully to selected cost centers, which results in the arrival of the total cost for each respective department, processes or jobs or contracts, etc.
Cost accounting can be understood as a specialized branch of accounting which involves classification, accumulation, assignment, and control of costs. The costing terminology of C.I.M.A. London defines cost accounting as “The establishment of budgets, standard costs and actual costs of operations, processes, activities or products, and the analysis of variances, profitability or the social use of funds”.
The main difference is to be understood is that cost accounting is different from cost. Wherein the cost accounting provides only the basis and particulars for the ascertainment of costs, and once the details are made available, costing can be carried out arithmetically by means of standard costing statements or by fundamental accounting.
OBJECTIVES OF COST ACCOUNTING
The objectives of cost accounting into a vital part of accounting is because of its importance on the following key areas such as-
- Ascertainment of cost
- Fixation of the selling price
- Proper recording of cost in respective cost centers
- Measuring efficiency and implementation of cost control.
Therefore the main objective to understand the pattern of expenditure on materials, wages, and overhead are recorded, classified, and allocated to the cost of products and services may be accurately ascertained since these costs determine the sales and profitability margins.
SIGNIFICANCE OF COST ACCOUNTING
The significance of cost accounting emerged especially due to the limitations in financial accounting in handling the cost areas. Costing and Cost Accounting have gained their importance as the management has realized what significant impact that cost monitoring and control can add value to the organization.
The majority of the business houses involve the expenditure on materials, labor, and other items required for manufacturing a product. It is a responsibility of the management to ensure all their factors are put into optimum use without any wastage at each stage. It has to ensure that no machinery remains idle or under capacitated, efficient labor is given due incentive and inefficiency in labor are identified and addressed appropriately, and costs are properly ascertained, etc.
Apart from the management, there are several stakeholders such as creditors and employees who get benefited in numerous ways by the practice of a good costing system. Cost accounting enables the organization to increase its overall productivity and also serves as an important tool for the industry at large. Let’s get to know about the Costing as an aid to various stakeholders and how it helps in the prosperity of the business and nations.
- For Management
- The management is the biggest benefactor of cost accounting as it provides an invaluable aid to management. The detailed costing information made available to them enables them to maintain effective control over inventory and stores, to increase the efficiency of the organization and limit the wastage. A good system of costing offers the following benefits:
- Helps in periods of trade depression and competition market: In periods of trade depression, an organization cannot afford to have losses that pass unchecked. The management must be aware of the areas in which economies may be looked for, waste can be eliminated and efficiency can be increased. This is not only for an organization to survive but also for its continued growth. It is wiser to know the actual cost of their products before taking upon any scheme of price reduction. An adequate system of costing facilitates all these requirements and serves as a management tool.
- Aids in fixing of price: Though in perfectly competitive markets it’s the law of supply and demand which determine the price of the product, cost at the end of the manufacturer is a vital number too. And when it is appropriate to manage the cost the costing records help in fixing or changing the price charged.
- Helps in making estimates: The availability of costing records provide a reliable basis for making estimates, short term, and long term budgets, quoting tenders, etc.
- Helps in channelizing production on favorable areas: Proper costing practice makes it feasible for the management to distinguish between profitable and non-profitable activities. Wherein the more concentration towards profitable operations can be implemented by eliminating non-profitable ones.
- Elimination of wastage: As cost accounting deals the detailed recording and analysis of break-up of costs, it enables the possibility to identify and arrest various forms of wastages or losses.
- Enables adequate comparative data: Proper maintenance of costing records provides a wide variety of costing data for comparisons. This helps the management in planning and formulation of future business and operational plans of the organization.
- Provides data for periodical Financial Statements: Costing records provides the management with all necessary information for the preparation of the Profit and Loss Account and Balance sheet at regular and intervals as and when required by the management.
- Helps in determining areas of improvement and enhancing efficiency: Efficiency of people, machinery and process can be measured; thereby steps can be taken for cost control and increase efficiency. Thus losses due to wastage of materials, idle time spent by workers, poor supervision, etc., get exposed to the management and can be appropriately fixed.
- Helps in inventory control: It brings in an effective control which the management requires in respect of stock of materials, work-in-progress and finished goods.
- To external stakeholders – Creditors, Bankers, etc.,
- Most of the banks have the stock audit in practice to identify the lending risk-based in the cost management of the organization. As the investors, banks, and creditors have a significant stake in the success of the business concern, an efficient system of costing records gives them confidence in the reliability of cost management of the organization. They can arrive at the profitability and future prospects of the organization based on the costing records.
- To Employees
- The very next stakeholder and also an internal interest holder are the employees of the organization. They too have a vital interest in their organization they are working for. They are also benefited in a number of ways by the installation of an efficient system of costing, wherein it benefits them with continuous employment, higher remuneration through incentives, bonus plans, etc.
- To National Economy
- An efficient system of costing brings prosperity not only to a single organization; it extends to the industry and market. This in turn results in stepping up of the government’s revenue. The overall economic development takes place as a consequence increase in efficiency of production by whatever name called. Cost control, cost reduction, waste elimination, and working at optimal efficiency lead to the progress of industry and consequently of the country as a whole.
However, Costing is a very wider concept. A cost must always be studied in relation to its purpose and objective. Thus, different costing methods may be used to ascertain for different purposes and conditions.
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