Cost Accounting | Meaning | Objectives | Advantages | Features
Arjun EP
Basics of cost accounting are:
Meaning of cost accounting,
Objectives of cost accounting,
Advantages of cost accounting,
Features of cost accounting,
Limitations of cost accounting
Meaning of Cost Accounting | Concept of Cost Accounting
Cost accounting is the application of accounting, costing, principles, methods, collection, classification and techniques.
It is used for ascertaining the cost of whole production and cost per unit.
Generally, it is based on estimation. It compares past or previous data at present for future purpose.
It contains budget, standard cost, actual cost, process, analysis, profitability, social funds etc.
Thus, cost accounting has the following features:
It is a process of accounting for cost;
It records income and expenditures related to the production of goods and service;
It provides statistical data to prepare tender and quotations;
It is related to cost calculation, cost controls and cost reduction;
It establishes a standard budget and variances or deviations;
It provides the right information to the right person at the right time for planning, evolution, control and decision making.
Definitions of cost accounting
According to Professor R. N. Carter, “Cost accounting is a system of recording an account about the manufacturing of a certain commodity (goods) or a particular job.”
According to the National Association of Accountant, USA, “A systematic set of procedure for recording, reporting and measuring of cost of manufacture goods and performing services in aggregate and in detail.”
According to Institutes of Cost and Management Accountants, London, “The application of costing and cost accounting principles.”
Objectives of Cost Accounting
The main objective of cost accounting is to find out the cost of goods or service at every stage of production.
There are a lot of objectives, out of them here are some:
Cost classification
The cost accounting helps to study, analyze and classify the cost of production at different levels.
These levels are prime cost, work cost, cost of production, cost of goods sold and total cost.
Finding out the total cost
It helps to find out total cost and cost per unit at different levels of production.
Management of the company can check and control the excess cost.
Finding out estimated profit
Profit is the most important for a business company.
Cost accounting helps to find out an estimated profit.
There are two methods to find out the profit.
They are profit on cost and profit on sales.
Determining selling price
Everything of the company is depended on sales of goods or service providing.
Cost accounting helps to determine the selling price of goods or service.
It is estimated by adding a profit percentage to the total cost.
Control wastage
Cost accounting helps to control over wastage of materials during production.
More wastage increases the cost of a product.
Therefore, it should be controlled.
Idle time
Cost accounting helps to find out the idle time of labour and idle time of machines.
Idle time increases the cost of the product.
Therefore, it should be controlled.
Providing data
Most of the company purchases goods or services based on a tender.
Cost accounting supplies useful data for management to make a decision.
It provides data for submitting tender or quotation.
Internal audit
The audit is the system to control cost and error.
Cost accounting helps to organize internal audit.
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Cost Reconciliation Statement |
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Unit Costing (Output Costing) |
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Advantages or Functions of Cost Accounting
Cost accounting is the most important to the manufacturers.
Other objectives of cost accounting are as follows:
Cost comparison
Cost accounting helps to compare total cost or unit cost at a different level of production in different departments, jobs and process.
Price fixation
Cost accounting helps to fixation the selling price.
It also helps with the tender price.
Cost controlling
Cost accounting helps to control the cost at different levels.
These costs may be about materials, labour and overhead.
Helpful in planning and decision making
Cost accounting helps the management to plan and make a decision.
Like manufacturing or buy, operate or shut down, select the profitable method, fixation the selling price etc
Checking accuracy
Cost accounting helps to check or reconcile the differences between cost accounting and financial accounting.
Advantage to workers
Cost accounting helps to increase the living standard of workers by applying incentive wages plan.
Advantage to customers
Cost accounting helps to provide goods at a lower cost to customers by producing large quantity.
Advantage to investors
Cost accounting provides detail information to the investors about cost control, profit-making and future planning of manufacturing company to invest their investments.
Advantage to government
Cost accounting helps to collect data about budget, import-export, taxation, industrial policy.
That helps the government to take a proper decision.
Importance of Cost Accounting
There are lots of importance of cost accounting to manufacturing company.
It has other importance also; they are as follows:
Importance to management
Cost accounting helps to management for cost determination, cost control, fixation of the selling price, tender price etc.
Importance to workers
It helps to increase the living standard of workers by applying incentive wages plan.
Thus it is important to workers.
Importance to customers
When goods are produced in large quantity, cost per unit decreases.
A manufacturing company can sell its goods at a lower cost.
Customer can purchase goods at a cheap price.
Importance to investors
It provides detail information to the investors about cost control, profit-making and future planning of the manufacturing company.
They can invest their money to earn a maximum dividend.
Importance to government
The government takes tax from manufacturing company.
It also helps to collect data about budget, import-export, taxation, industrial policy etc.
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Accounting Equation |
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Journal Entries in Nepali |
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Journal Entries |
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Journal Entry and Ledger |
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Ledger |
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Subsidiary Book |
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Cashbook |
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Trial Balance and Adjusted Trial Balance |
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Bank Reconciliation Statement (BRS) |
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Depreciation |
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Financial Accounting and Analysis (All videos) |
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Accounting Process |
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Accounting for Long Lived Assets |
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Analysis of Financial Statement |
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Features of Cost Accounting | Characteristic of Cost Accounting
The following are the main features of cost accounting:
Branch of accounting
There are different types of accounting.
They are financial accounting, cost accounting, management accounting, tax accounting, environment accounting etc.
Cost accounting is the one of the branch of accounting.
Cost accounting is used to find out the total and cost per unit of goods or services.
Cost control
Cost accounting helps to control the cost at different levels.
In cost accounting, cost of goods or services can be calculated at different levels.
These costs may be about materials, labour and overhead.
Therefore, controllable cost can be controlled.
Adding cost
Cost accounting is a base for adding cost.
Different costs are added to make finish products.
Product may be an individual job or process work.
Inventory information
Cost accounting gives cost data regarding stock (inventory, merchandise) of raw materials, work-in-progress and finished goods.
These inventories have different value to record in cost accounting and financial accounting.
Price fixation | Selling price
Cost accounting helps to fixation the selling price of goods or service price.
After calculating total cost, firm adds profit percentage either on cost or sales.
It also helps with the tender price.
Periodical account
Cost accounting helps to make periodical accounts.
To compare cost, it provides desirable data.
Cost department can compare actual cost and standard cost (estimated cost) easily.
Reconciliation
Cost accounting provides data to compare with financial accounting.
Cost accounting is based on estimation.
If there are overcast cast or under cast in production, they can be compared.
Flexible | Elasticity
Cost accounting is flexible in nature.
Its expansion or reduction may be possible as per need.
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Limitation of Cost Accounting
The principles of cost accounting are flexible.
It is changed according to time, situation and planning of the manufacturing company.
It has the following limitation:
Lack of uniform costing
There are different costing procedures in a different manufacturing company.
Therefore, the same product has a different cost.
Thus, there is a lack of uniform in cost accounting.
Expensive
There are many formalities to perform a standard cost system.
It is very expensive.
Therefore, it is not suitable for small industry.
Based on estimation
Cost accounting is based on estimation.
Financial accounting is based on actual.
It may be a difference in financial accounting.
No transaction for income or gain
There are some incomes in financial accounting; they are not included in cost accounting:
Interest, dividend, rent, discount, commission etc received.
Profit on sales of assets and investment.
Transfer fees received from shareholders.
Provision for bad debts recovered etc.
No transaction for expenses or losses
There are some expenses in financial accounting; they are not included in cost accounting:
Goodwill, preliminary expenses, trademark etc are written off.
Interest paid on the loan, debenture and capital.
Discount or loss on the issue of shares or debentures.
Loss on sales of assets and investment.
Provision for bad debts etc.
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