What is cost accounting? What are its objectives?
Are you finding it difficult to manage your expenses? You might be well aware that to run a business successfully, it is important to know to control your expenses. For this purpose, it’s important you keep a record of all your operating costs. This is where cost accounting comes into the picture. If you are wondering, how cost accounting is beneficial for your business, then you need to continue reading.
Modern methods of cost accounting first emerged in the manufacturing industries, though its advantages helped it spread quickly to other sectors. For many firms, cost accounting helps create and measure business strategy in a more organic way.
Cost accounting is distinct and separate from general financial accounting, which is regulated by generally accepted accounting principles (GAAP) and is critical for creating financial statements. Instead, cost accounting aims to report, analyze and lead to the improvement of inter-business cost control and efficiency. Cost accounting is a system of operational analysis for management.
Cost Accounting Defined
Cost Accountancy is the process of accounting for cost. It begins with the recording of expenditure and ends with the preparation of statistical data. Cost Accounting is a formal mechanism of ascertaining and controlling the costs of products or services.
It is thus helpful to the management in decision making which also requires the costing information. However, if a firm keeps cost and financial accounts separately then their reconciliation is also necessary so as to verify the accuracy of both sets of accounts.
Cost accounting is also used for control purposes and guidance to management. It involves the ascertainment of the cost of every job, order, product, process or service.
Objectives of Cost Accounting
- Determination of Cost
- Basis for fixing selling prices
- Cost Control
- Cost Reduction
- Identifies and eliminates wastes like material, expenses, equipment, tools and so forth.
- Ensures optimum utilization of resources
- To correctly analyze the cost of both the process and operations.
- Determination of the profitability of each of the products and help management in the maximization of these profits.
- Help in the preparation of budgets and implementation of budgetary control.
- Aid management in the formulation and implementation of incentive bonus plans on the basis of productivity and cost savings.
Functions of Cost Accounting
- Bookkeeping - Bookkeeping involves recording of cost according to pre-arranged or predetermined classification.
- Cost Control - The cost control is exercised through cost collection, cost analysis, cost presentation and cost interpretation.
- Cost Analysis - Cost Analysis deals with determination of different relationship between cost and various determinants of costs.
- Cost Comparison - The cost of alternative products, activities, methods or areas is compared in the field of production or distribution.
- Cost Planning - Cost planning involves the accounting of all costs in the records in a proper manner.
- Cost Finding - Cost finding is the measurement or estimation of different products, departments or other segments of the company’s operations.
In every business, pre-planning your business strategy is crucial. Without a proper idea of the financial state of the organization, the business strategy is incomplete. When you are aware of the costs, you know where the profit margin is lacking. It becomes easier to eliminate the extra cost being incurred and make a better business finance strategy. Also, cost accounting helps you to keep an eye on the increasing costs. If the cost of raw materials is increasing annually, then it allows companies to decide a future course of action to reduce or control the increasing costs. For this purpose, a firm may consider approaching other vendors or decide to manufacture the raw materials themselves. Accordingly, the management can decide on future strategies for the company.
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