Cost Accounting Part 1

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Introduction Part 1

Every business either it is manufacturing entity or service providing entity they incur certain cost in order to make their products or to deliver their services. So, cost is an important term associated with every kind of business. It is necessary to know how much money they spend on each activity in order to produce the product/service. Those activities are called as cost items. In order to ascertain costs in an efficient manner and to make many decisions basing on costs associated with the process or methods it is necessary to maintain a systematic record of costs incurred. That systematic record is done by Cost Accounting.

Definition: According to Cost and Management Accounting, London “Cost accounting is the process of accounting from the point at which expenditure is incurred or committed to the establishment of its ultimate relationship with cost centers and cost units. In the widest usage, it embraces the preparation of statistical data, application of cost control methods and the ascertainment of profitability of activities carried out or planned.”

In a nutshell, Cost Accounting is the study of cost aspects of the product or service.

  • Cost Accounting is an internal aspect of the organization

  • It is a system of accounting, which provides the information regarding the ascertainment, and control of costs of products, or services.

  • It measures the operating efficiency of the enterprise.

  • Cost Accounting is aimed at providing cost data, statement and reports for the purpose of managerial decision making.

Difference between Costing and Cost Accounting:

The two terms are being using interchangeably. But the scope of Cost Accounting is broader than that of costing. Costing includes the techniques (principles used to ascertain the costs) and process (determining costs day to day on determined method of costing). It involves “the classifying, recording and appropriate allocation of expenditure for the determination of costs of products or services; the relation of these costs to sales value; and the ascertainment of profitability”.

Scope of Cost Accounting:

  • Cost Book-keeping: It records all the data regarding the incurrence of costs associated with the production process. It is basically done based on double entry system.

  • Cost system: Systems and procedures are devised for proper accounting for costs.

  • Cost Ascertainment: It ascertains the costs of products, services, processes, jobs, methods etc. It helps in making decisions in pricing, planning and controlling.

  • Cost Analysis: It analyses the incurred costs and compare the cost with the pre-determined cost expenditure estimations as per budget. Cost Analysis helps in identifying the casual factors which results more costs than expected expenditure.

  • Cost Comparison: Cost Accounting provides the information regarding costs incurred. We can compare the costs for different methods, different technologies and different years of same product or different products.

  • Cost Control: Cost Accounting provides cost data for every item. That helps in identifying whether the costs are as per standards or not. If the costs are more they can be controlled by taking necessary action.

  • Cost Reports: Cost A/c provides reports on costs regularly. Those reports are generated for the internal purpose and utilized by management at different levels in decision making.

    Cost reports

    Cost Reports

    Cost reports

Scope of Cost Accounting