Meaning of Cost Accounting
Cost Accounting is an art or process of recording, analyzing and classifying of expenditure for the purpose of product costing or service costing, ascertainment of profitability, operational planning and cost control.
It is a forward-looking approach which is related to the recording, analyzing and classifying of expenditure with the objective of ascertaining the total and per unit cost of product or service.
ACCORDING TO ICMA (Institute of Cost and Management Accountants)
“Cost accounting is the process of accounting for cost from the point at which expenditure is incurred or committed to the establishment of its ultimate relationship with cost centers and cost units. In its widest usage, it embraces the preparation of statistical data, the application of cost control methods and ascertainment of the profitability of activities carried out or planned.”
ACCORDING TO RN CARTER
“It is a system of recording in accounts the materials used and labor employed in the manufacture of certain commodity or on a particular job.”
ACCORDING TO GORDON SHILLINGLAW
“Cost Accounting is defined as the body of concepts, methods and procedures used to measure, analyze or estimate the costs, profitability and performance of individual products, departments and other segments of a company’s operations, for either internal or external use or both and to report on these questions to the interested parties.”
ACCORDING TO THE HORTON AND MASON
“Cost Accounting is a method of recording accurately the facts of manufacture or other undertakings in such a way that necessary information thereon maybe available in the form required at the earliest possible moment.”
Thus, cost accounting refers to that branch of accounting that:
- Deals with Costing i.e. the techniques and process of ascertaining costs.
- Helps in Analyzing and classification of costs on varied basis.
- Is internal accounting to the organizations.
- Assists the management in controlling the costs.
OBJECTIVES OF COST ACCOUNTING
The objectives of cost accounting can vary depending on the organization and its specific needs. However, here are some common objectives of cost accounting:
- Cost Determination: Cost accounting aims to determine the cost of producing goods or services. It involves identifying and measuring various costs associated with production, such as direct materials, direct labor, and manufacturing overhead.
- Cost Control: Cost accounting helps in controlling costs by providing information on the factors that contribute to cost variations. It enables management to identify areas of excessive costs and take appropriate measures to reduce or eliminate them.
- Profit Planning and Pricing Decisions: Cost accounting provides essential data for profit planning and determining product pricing. By understanding the costs involved in producing goods or services, management can set appropriate selling prices to ensure profitability.
- Performance Evaluation: Cost accounting facilitates performance evaluation by comparing actual costs with budgeted or standard costs. It helps in identifying and analyzing cost variances, which can provide insights into areas that need improvement.
- Decision Making: Cost accounting assists in making informed decisions by providing relevant cost information. It helps management evaluate different alternatives and choose the most cost-effective options.
- Inventory Valuation: Cost accounting plays a crucial role in valuing inventory accurately. By assigning costs to inventory items, it enables organizations to determine the value of their stock for financial reporting purposes.
- Budgeting: Cost accounting supports the budgeting process by providing cost data that aids in setting realistic budgets. It helps in allocating resources efficiently and monitoring actual costs against the budgeted amounts.
- Facilitating Financial Statements: Cost accounting provides valuable information for preparing financial statements, such as income statements, balance sheets, and cash flow statements. It ensures that costs are properly recorded and allocated to different periods and cost centers.
- Continuous Improvement: Cost accounting promotes a culture of continuous improvement by identifying areas where costs can be reduced or processes can be optimized. It helps in implementing cost-saving measures and enhancing operational efficiency.
Overall, the primary objectives of cost accounting revolve around cost determination, control, planning, decision making, performance evaluation, and supporting financial reporting processes. By achieving these objectives, organizations can enhance their cost management practices, increase profitability, and make informed business decisions.
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Advantages and nature of cost accounting
