MEANING AND DEFINITION OF COST ACCOUNTING
The system of cost accounting is a specific branch of general accounting in which accounts of various expenses made over a product or service are prepared in such a way as to obtain information and data for the guidance of management and to work out the total and per-unit cost.
Cost accounting is that branch of accounting which deal with the ascertainment of costs. Its main objects to calculate the total cost, per unit cost, classification of overheads, cost ascertainment and cost control.
Walter W. Bigg
NATURE AND CHARACTERISTICS OF COST ACCOUNTING
The main characteristics of cost accounting can be summarized as follows:
1. Cost accounting is a branch of accounting.
2. Cost accounting is both art and science.
3. Cost accounting is classifying, recording and appropriate allocation of expenditure.
4. Total or per unit cost of the product or service can also be known from cost accounting.
5. Work-in-progress can also be find out from this system.
6. The information provided by this system can be used in solving several management problems.
7. Cost accounts are also helpful in controlling the costs.
OBJECTIVES OR FUNCTIONS OF COST ACCOUNTING
The main objectives of cost accounting are as follows:
- Cost Determination: The main objective of cost accounting is to know the total and per-unit cost of products, services, contracts or processes.
- Cost Control: The second objective of cost accounting is to control the cost so that the maximum and better production on minimum cost may be possible. To achieve this objective, the technique of budgetary and standard cost control is adopted.
- Cost Reduction: Cost accounting system controls the expenditure with the objective of cost reduction.
- Guidance to Management: The information provided by the cost accounts guide the management in policy decisions.
- Determination of Selling Price: One of the objectives of cost accounting is to fix the reasonable sale price so that the competition may be faced and profit maybe earned.
- Compliance to Statutory Requirements: Under section 209(1) (d) of the Companies Act, 1956, the central government has made it compulsory for 47 industries to maintain cost accounts. Thus, compliance with statutory obligations is also one of the objectives of cost accounting.
ADVANTAGES AND IMPORTANCE OF COST ACCOUNTING
Cost accounting system has been fully successful in achieving its objectives. Its importance is, therefore, continuously increasing. It is advantageous not only to the manufacturers or producers but to others also. In brief, the advantages of cost accounting may be summarized
I. ADVANTAGES TO PRODUCERS AND MANAGERS
The advantages of maintaining cost accounts to the producers and managers are as follows:
Best utilisation of Material, Labour and Plant Detailed: accounts are prepared in cost accounts for material, labour and plant. Thus, the theft of material and the misutilisation of labour can be easily checked and the best utilisation of the plant can be made.
Knowledge of Profitable and Non-profitable Activities: In cost accounting, separate cost analysis of each job, process, department, product or service is done. It helps in knowing their separate profit or loss. Its advantage is that non-profitable activities may be suspended and profitable ones may be continued or efforts may be made to improve the non-profitable activities.
Analytical and Comparative Study of Production Cost: In cost accounting, the cost per unit is calculated by classifying the total cost of production in various costs such as direct and indirect cost, fixed and variable cost, works, office and distribution cost, etc. This analysis reveals the changes in cost and their causes in two periods. It helps in checking the increasing expenses and reducing profits. It also develops the capacity of the organization to face competition.
Helpful in Fixing Sale and Tender Prices: The cost of production of a product at various stages may be easily known with the help of cost accounts. Thus, the sale price, after adding a reasonable profit in the cost may be easily fixed. The cost accounts are also helpful in quoting the tender price. In cost accounting, the sale price and tender price are fixed keeping in view the cost in the last period and the current trends.
Helpful in Controlling the Cost: Cost accounts provide useful data to the management for planning, budgeting and controlling cost. It helps in controlling the cost with the application of standard costing and budgetary control. Cost comparison also helps in cost control. Thus, cost accounts are helpful in controlling the cost.
Knowledge of Losses or Inefficiencies: Cost accounts not only show the cost of production but also reveals losses or inefficiencies occurring in any form such as idle time, excessive spoilage or scrap, under-utilisation of plant and machinery.
Helpful in Taking Vital Decisions: The information provided by the cost accounts help the management in taking several important decisions. Whether the management should start manufacturing a new product to supplement their old product or it should be purchased from the market, what should be a more profitable product mix and how the unused capacity should be utilised, all such complex problems are solved with the help of information supplied by the cost accounts.
Utility in the Period of Depression: The period of depression is the worst period for producers. During this period, even if the variable cost is fully recovered, the production work may be continued. With the help of cost accounts, the variable cost may be easily known.
II. ADVANTAGES TO EMPLOYEES
A sound system of costing benefits well-performing employees in different ways:
- Employees know in advance the efficiency level expected of them. This imparts clarity to their work methodology and the pace they are required to maintain. Undue work pressure is also avoided.
- Efficient and inefficient employees get distinguished. This acts as a big motivator.
- Employees get rewarded in the form of bonus and incentive wage.
- Employees, in general, get benefited due to higher growth of the organization resulting from a high level of cost-consciousness. Employees of a profitable and growing organisation enjoy the better status, higher security of a job and better prospects of career advancement.
III. ADVANTAGES TO CONSUMERS
Cost accounts help in controlling the production cost and in improving the quality of the product. The advantages of a reduction in production cost and improvement in product quality reach the consumers to a very great extent as they get good quality products at cheaper prices. Thus, cost accounts develop a feeling in consumers that the prices charged from them are reasonable.
IV. ADVANTAGES TO GOVERNMENT
The detailed and analytical information regarding various industries, provided by the cost accounts depict their actual position. This helps the government in formulating important policies regarding price determination, price control, wages fixation, dividend payment, fixation of excise duty, exports promotion and import restrictions, etc.
It is clear from the above description that maintenance of the cost accounting system is not only beneficial to the producers but to every part of the society.
