Accounting: Cost Accounting: Objective and Importance of Cost Accounting

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Objectives of Accounting

  • To determine the Selling Price: Every company fixes an effective price to attract more customers for their products. For this company consider many factors like quality, design, innovativeness, uniqueness, competitor’s price and many other factors. But the important factor to fix the price is the cost incurred to produce the product. The cost is the benchmark or basis to fix the price. That results margin of profit.

  • To Control Costs: Costs can be controlled if we understand the cost of each activity or item. Cost A/c uses various techniques like Budgetary Control, Standard Costing and Inventory Control to control the costs. That will identify the wastages or unnecessary activities which results additional costs. Then efficiency of the enterprise will be improved.

  • To Provide Information for decision making: Information provided by cost accounting is utilized by management at different levels. That helps in decision making regarding formulating operative policies. The decisions regarding –

    • Determination of cost-volume-profit relationship

    • Make or buy a component

    • Shut down or continue operation at a loss

    • Continuing with the existing machinery or replacing them byimproved and economical machines

  • To ascertain the costing profit: Cost A/c helps in ascertaining the costing profit or loss of any activity on an objective basis by matching cost with the revenue of the activity.

  • To facilitate preparation of financial and other statements: Cost Accounting provides reports on regular intervals of time. May be on daily basis, weekly basis or monthly basis based on requirement. Those reports consists of units produced, accumulated cost with analysis and information regarding stock of raw material, semi-finished and finished goods. Those reports are utilized by management in order to make effective financial statements.

Importance of Cost Accounting

Importance to Management: Cost A/c helps management in decision making regard

  • Ascertaining the costs

  • Helps in price fixation

  • Helps in cost control and cost reduction by reducing wastages and implementing effective ways of production

  • Helps in identifying unprofitable activities and eliminate them

  • Helps in preparing financial statements and to check the accuracy of them

  • Helps in inventory management by considering costs incurred for maintenance and handling of raw material, processed goods and finished goods

  • Helps in estimating the costs of tenders to quote effective bid

  • Importance to employees: An efficientcostingsystembenefits employees through incentives plan intheir enterprise, etc. As a result both the productivity and earning capacity increases.

  • Importance to National Economy: Effective cost system helps in effective utilization of resources and reduces the wastage. This results improvement in production capacity of the nation. The economy will be developed due to effective production systems.

  • It will provide data base for operating policy – that technology need to be adopted, replacement of machinery, methods of production etc.

Difference between Financial Accounting and Cost Accounting

Table 1 Supporting: Difference between Financial Accounting and Cost Accounting

Tablutation of: Basis, Financial Accounting, Cost Accounting

Basis

Financial Accounting

Cost Accounting

Definition

Financial Accounting is the act of classifying, storing, recording and analyzing the financial transactions of the company through financial statements to improve the profitability and transparency of the company.

Cost Accounting is the art and science of applying the costing methods, techniques, and principles to the products, projects, and processes to improve the profitability and to reduce the overall cost of the business.

Objective

To reflect the accurate financial picture of an organization i.e. its financial performance and financial position.

To ascertain per unit cost of every product, process or a project and to control the costs.

Nature

It Classifies records, presents and interprets transactions in terms of money.

It classifies, records, presents and interprets in a significant manner the material, labour and overheads costs.

Recording Data

It records historical data

It records and presents the estimated/budgeted data. It makes use of both the historical costs and pre-determined costs.

Users of Information

Shareholders, creditors, financial analysts and government and its agencies etc.

It is for internal purpose utilized by management at different levels.

Analysis of costs and profits

It shows profit or loss of the organization.

It provides details of costs and profit of each products, process, job and contracts etc.

Time period

F.S are prepared for a definite period i.e. for every financial year. From April 1st to March 31st.

These are prepared based on our convenience whenever they are required.

Presentation of Information

Presentation of data is based on standard format.

No such standard formats to present cost accounting reports. It is as per company requirement.

Limitation of Cost Accounting

  • It is expensive because analysis, allocation and absorption of overheads require considerable amount of additional work. So, suitable for big organizations.

  • The results shown by cost accounts differ from those shown by financial accounts. Preparation of reconciliation statements frequently is necessary to verify their accuracy. This leads to unnecessary increase in workload.

  • Its results duplication of work so unnecessary. Some organizations are working effectively without cost accounting.

  • Cost Accounting alone does not control costs. Effective management can control costs well without taking cost accounting into consideration.

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