WHY COST ACCOUNTING IS NECESSARY ???
COST ACCOUNTING
Cost Accounting is an art or process of recording, analysing 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, analysing 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.”
WHY COST ACCOUNTING IS NECESSARY?
Cost accounting is the branch of the accounting. As accounting is associated with recording only day-to-day transactions, it fails to report any data regarding the cost incurred in producing any unit of commodity. Thus, to provide the detailed view of the cost incurring in various activities, processes, or jobs; cost accounting has been emerged. The cost accounting is necessary because of the following reasons:
FOR MATERIAL CONTROL
The traditional accounting provides the amount of opening stock and closing stock of materials and the cost of the materials consumed by preparing manufacturing and trading account. But it fails to provide the information about
- How much units are issued to various departments?
- What is the value of raw materials used in the production process?
- How much cost has incurred in each process individually?
All these questions can be answered by preparing the cost accounting records.
TO DETERMINE INFORMATION ABOUT LABOR COST
Labor is an integral part of the business. The success of the business depends highly upon the efficiency and inefficiency of the labor. Financial accounting records the total amount of wages or salaries provided to the labor and nothing more than that in the accounting records. It fails to provide the following information:
- How many workers are employed in the organization?
- How many workers are efficient or inefficient?
- How many workers are employed on various jobs, processes etc.?
- What are the varied rates of wages and salaries paid to various categories of labor?
- What is the number of working hours of the labor?
All this detailed can be getting from the cost accounting. This has led to the emergence of cost accounting.
TO ASCERTAIN TRUE COST OF PRODUCTION
The true cost of production can be ascertained by taking into consideration the cost of raw materials consumed, cost of labor, cost of normal or abnormal loss, cost of various operations, and cost of each process. However, the financial accounting records cost of materials consumed which does not provide the clear view of the each element of cost. This can only be ascertained by following the cost accounting.
TO DEVELOP SYSTEM OF STANDARDS
To accomplish a goal, the standards should be set in advance. In accounting, the standards are set regarding the overall performance of the business concern. No target is set regarding
- How many units are to be produced?
- What will be estimated hours of working?
- The standard cost involved in each task?
Only the cost accounting facilitates the setting of targets for such issues and analyzing the deviations and then taking steps to correct them.
TO MAKE RECORDS FOR WASTAGES
Cost accounting is needed to take into account the records regarding the wastage of materials, man-hours, and machine-hours taking place during the course of production. These wastages are not recorded and communicated by preparing the financial accounts like trading account, profit and loss account and balance sheet.
TO PROVIDE ASSISTANCE IN COST CONTROL
Financial accounting has no system of cost control. It records the expenses when they have already been incurred. So it was just a post-mortem analysis of the records. There is no system to fix the responsibility for not achieving the set standards. So cost accounting is needed to provide a framework for cost control. This is facilitated by the cost accounting through the use of its tools and techniques of marginal costing, break-even analysis, standard costing and variance analysis and budgetary control etc.
TO PROVIDE ASSISTANCE IN DECISION MAKING OR PLANNING
Financial accounting system does not provide any information or guidance to take the decisions regarding the following issues:
- Evaluation of profitability of alternative methods of production.
- Open or shut down decisions.
- Continue or discontinue any product line or product category.
- Manufacture or buy decision.
- Determination of break-even point and margin of safety etc.
IDENTIFIES INEFFICIENCIES AND AREAS FOR IMPROVEMENT
Cost accounting helps identify areas where costs can be reduced, processes can be improved, and productivity can be increased. This information can help in making decisions that improve efficiency and profitability.
SUPPORTS REGULATORY COMPLIANCE
Many regulatory agencies require businesses to maintain accurate records of their costs, which can be achieved through cost accounting.
FACILITATES COST CONTROL
By monitoring costs, businesses can control expenses and ensure that they are staying within budget.
In summary, cost accounting is necessary for businesses to make informed decisions, prepare budgets and forecasts, identify areas for improvement, comply with regulations, and control costs.