Cost accounting is the classifying, recording and appropriate allocation of expenditure for the determination of the costs of products or services, and for the presentation of suitably arranged data for purposes of control and guidance of management. It includes the ascertainment of the cost of every order, job, contract, process, service or unit as may be appropriate. It deals with the cost of production, selling and distribution.
It is thus the provision of such analysis and classification of expenditure as will enable the total cost of any particular unit of production or service to be ascertained with reasonable degree of accuracy and at the same time to disclose exactly how such total cost is constituted (i.e. the value of material used, the amount of labour and other expenses incurred) so as to control and reduce its cost.
Thus, cost accounting has the following features:
- It is a process of accounting for costs.
- It records income and expenditure relating to production of goods and services.
- It provides statistical data on the basis of which future estimates are prepared and quotations are submitted.
- It is concerned with cost ascertainment, cost control and cost reduction.
- It establishes budgets and standards so that actual cost may be compared to find out deviations or variances.
- It involves the presentation of right information to the right person at the right time so that it may be helpful to management for planning, evaluation of performance, control and decision making.
Objectives of Cost Accounting:
Objectives of cost accounting are ascertainment of cost, fixation of selling price, proper recording and presentation of cost data to management for measuring efficiency and for cost control and cost reduction, ascertaining the profit of each activity, assisting management in decision making and determination of break-even point.
Following are the main objectives of cost accounting:
- To ascertain the cost per unit of the different products manufactured by a business concern;
- To provide a correct analysis of cost both by process or operations and by different elements of cost;
- To disclose sources of wastage whether of material, time or expense or in the use of machinery, equipment and tools and to prepare such reports which may be necessary to control such wastage;
- To provide requisite data and serve as a guide for fixing prices of products manufactured or services rendered;
- To ascertain the profitability of each of the products and advise management as to how these profits can be maximised;
- To exercise effective control if stocks of raw materials, work-in-progress, consumable stores and finished goods in order to minimize the capital locked up in these stocks;
- To reveal sources of economy by installing and implementing a system of cost control for materials, labour and overheads;
- To advise management on future expansion policies and proposed capital projects;
- To present and interpret data for management planning, evaluation of performance and control;
- To help in the preparation of budgets and implementation of budgetary control;
- To organize an effective information system so that different levels of management may get the required information at the right time in right form for carrying out their individual responsibilities in an efficient manner;
- To guide management in the formulation and implementation of incentive bonus plans based on productivity and cost savings;
- To supply useful data to management for taking various financial decisions such as introduction of new products, replacement of labour by machine etc.;
- To help in supervising the working of punched card accounting or data processing through computers;
- To organise the internal audit system to ensure effective working of different departments;
- . To organise cost reduction programmes with the help of different departmental managers;
- To provide specialized services of cost audit in order to prevent the errors and frauds and to facilitate prompt and reliable information to management; and
- To find out costing profit or loss by identifying with revenues the costs of those products or services by selling which the revenues have resulted.
Objections Against Cost Accounting:
A number of objections are generally raised against the introduction of costing on various grounds.
- Want of Necessity:
It has been argued that costing is of recent origin and that industries prospered in the past and are still prospering without the aid of costing and, therefore, expenditure incurred in installing a costing system would be an unnecessary expenditure.
This argument overlooks the fact that modern industries are running under highly competitive conditions and that every manufacturer should know the actual cost of production to decide how far he can reduce the selling price. Many industrial failure.’ in the past may be attributed to the lack of knowledge on the part of manufacturer of actual cost of production and, therefore, selling products below cost.
It is argued that modern methods of costing are inapplicable to many types of industries. It is true that costing cannot be applied with advantage to trading concerns and concerns of small size. But in many cases some methods of costing can always be devised to suit the requirements of the business.
It should be clearly understood that there is no stereotyped system of costing which can be applied to all types of industries. The system of costing should be so devised as to suit the business but not the business to suit the system.
- Failure in Many Cases:
It is argued that the adoption of costing system failed to produce the desired results in many cases and, therefore, the system is defective. The failure of a system may be due to several causes such as apathy or indifference of management, lack of adequate facilities, non-co-operation or opposition from the employees. So it is hasty to find fault with the system, if it fails to produce the desired results.
- Mere Matter of Forms and Rulings:
It is argued that after some time, a costing system degenerates into a matter of forms and rulings. This is not the fault of the system. It is the fault of the way in which the system is maintained. Forms and rulings are essential for a costing system but they must be revised and brought up-to-date in the light of altered conditions. If this is not done, the system is bound to degenerate into a mere matter of forms and rulings.
It is said that the cost involved in installing and working a cost system is out of all proportions to the benefits derived therefrom. It may be stated in this connection that a costing system must be a profitable investment and should produce benefits commensurate with the expenditure incurred on the system. If care is taken to devise a costing system to suit the requirements of the industry and avoid unnecessary elaboration, expenditure incurred in installing and operating the system will be a profitable investment and will bring adequate return.
Difference between Costing and Cost Accounting:
Main differences between costing and cost accounting are given as under: