Cost Accounting Theory | Meaning | Objectives | Importance | Limitation

 

Meaning of Cost Accounting

Cost accounting is the application of accounting, costing, principles, methods, collection, classification and techniques.

It is used for ascertaining cost of whole production and cost per unit.

Generally, it is based on estimation. It compares past/previous data at present for future purpose.

It contains budget, standard cost, actual cost, process, analysis, profitability, social funds etc.

 

Thus, cost accounting has following features:

It is a process of accounting for cost;

It records income and expenditures related to 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 standard budget and variances or deviations;

It provides right information to right person at 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 manufacturing of a certain commodity (goods) or a particular job.”

According to 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, (ICMA London), “Cost accounting is the application of costing and cost accounting principles.”

 

 

Objectives, Functions or Advantages 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 different level of production in different departments, jobs and process.

 

Price fixation

It helps to fixation the selling price.

It also helps for tender price.

 

Cost control

It helps to control the cost at different levels.

These costs may be about materials, labour and overhead.

 

Helpful in planning and decision making

It helps to management to plan and take decision.

Like manufacturing or buy, operate or shut down, select the profitable method, fixation the selling price etc

 

Check the accuracy

It helps to check or reconcile the differences between cost accounting and financial accounting.

 

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Importance of Cost Accounting

There are lots of importance of cost accounting to manufacturing company. It has other importance also. They are as following:

Importance to management

Cost accounting helps to management for cost determination, cost control, fixation of selling price, tender price etc.

 

Importance to workers

It helps to increase 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. 

Manufacturing company can sell its goods on lower cost.

Customer can purchase goods at cheap price.

 

Importance to investors

It provides detail information to the investors about cost control, profit making and future planning of manufacturing company.

They can invest their money to earn maximum dividend.

 

Importance to government

Government takes tax from manufacturing company.

It also helps to collect data about budget, import-export, taxation, industrial policy etc.

 

Features of Cost Accounting

The following are the main features of cost accounting:

Cost of each job

Cost accounting helps to find out the cost of each job, process or work.

Different costs are added to find out finish product.

 

Three elements

Cost accounting gives cost data regarding raw materials, work-in-progress and finished goods.

They have opening stock and closing stock of raw materials, work-in-progress and finished goods.

 

Based on estimate

It is a base to fix cost of a product;

Cost accounting is based on estimate.

Total cost of the goods or service may be more or less of estimation.

 

Management decision

Cost accounting helps to management in every stage of production.

Management can take decision of the cost estimation of the goods or services.

They can maintain the excess variable cost.

 

Great tool

Cost accounting is a great tool to figure out the efficiency of a unit or a process.

It can disclose wastage of time and resources.

 

 

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 its limitation.

Lack of uniform costing

There are different costing procedures in different manufacturing company.

Therefore, same product has different cost.

Thus, there is lack of uniform in cost accounting.

 

Expensive

There are many formalities to perform 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 difference than financial accounting.

 

No transaction for income or gain

There are some incomes in financial accounting that are not included in cost accounting. Such as:

·          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. Such as:

·          Goodwill, preliminary expenses, trade mark etc written off

·          Interest paid on loan, debenture and capital.

·          Discount or Loss on issue of shares or debentures.

·          Loss on sales of assets and investment.

·          Provision for bad debts etc.

 

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