THE NATURE OF COST
ACCOUNTING
Cost accounting, sometimes called management or managerial
accounting, should be considered the key managerial partner, furnishing
management with the necessary accounting tools to plan and control activities.
In the planning phase, cost accounting deals with the future. It
helps management to budget the future or predetermined materials costs, wages
and salaries, and other costs of manufacturing and marketing products. These
costs might be used to assist in setting prices and disclosing the profit that
will result, considering competition and other economic conditions. Cost
information is also provided to aid management with problems such as capital
expenditure decisions, expansion of facilities for increased sales or production,
make-or-buy decisions, or purchase-or-lease decisions.
In the control phase, cost accounting deals with the present,
comparing current results with predetermined standards and budgets. Cost
control, to be effective, depends upon proper cost planning for each activity,
function, and condition. Via the cost accounting media, management is informed
frequently of those operating functions that fail to contribute their share to
the total profit or that perform inefficiently, thereby leading to profit erosion.
Periodically, generally at the end of the fiscal period, cost
accounting deals with past costs for the purpose of profit determination and
thereby with the allocation of historical costs to periods of time. At this
point, cost accounting procedure is particularly concerned with the
application of manufacturing cost to units of products to be capitalized in
the ending inventory and transferred to cost of goods sold as shipments are
made.
More specifically,
cost accounting is charged with the tasks of:
1. Establishing costing methods and procedures that permit control
and, if possible, reduction or improvement of costs.
2. Aiding and participating in the creation and execution of plans
and budgets. 3."Creating inventory values for costing and pricing as
described by law and, at times, controlling physical quantities.
4. Determining company
costs and profit for .an annual or shorter accounting period, in total or by
segment, as determined by management or required by governmental regulations.
5. Providing management
with cost information in connection with problems that involve a choice from
among two or more alternative courses, that is, decision making. The decision
may be to enter a new market, develop the costs for a new product, discontinue
a product line, buy or lease equipment, or take other actions to increase
profits or solve problems.
ADVANTAGES OF COST ACCOUNTING
a) Helps in Decision Making: Cost
accounting helps in decision making. It provides vital information necessary
for decision making. For instance, cost accounting helps in deciding:
a. Whether
to make a product buy a product?
b. Whether
to accept or reject an export order?
c. How
to utilize the scarce materials profitably?
b) Helps in fixing prices: Cost
accounting helps in fixing prices. It provides detailed cost data of each product
which enables fixation of selling price. Cost accounting provides basis
information for the preparation of tenders, estimates and quotations.
c) Formulation of future plans: Cost
accounting is not a post-mortem examination. It is a system of foresight. On
the basis of past experience, it helps in the formulation of definite future
plans in quantitative terms. Budgets are prepared and they give direction to
the enterprise.
d) Avoidance of wastage: Cost
accounting reveals the sources of losses or inefficiencies such as spoilage, leakage,
pilferage, inadequate utilization of plant etc. By appropriate control measures,
these wastages can be avoided or minimized.
e) Highlights causes: The exact cause of an increase or
decrease in profit or loss can be found with the aid of cost accounting. For
instance, it is possible for the management to know whether the profits have
decreased due to an increase in labour cost or material cost or both.
f) Reward to efficiency: Cost
accounting introduces bonus plans and incentive wage systems to suit the needs
of the organization. These plans and systems reward efficient workers and improve
productivity as well improve the morale of the work -force.
g) Prevention of frauds: Cost
accounting envisages sound systems of inventory control, budgetary control and
standard costing. Scope for manipulation and fraud is minimized.
h) Improvement in profitability: Cost
accounting reveals unprofitable products and activities. Management can drop
those products and eliminate unprofitable activities. The resources released
from unprofitable products can be used to improve the profitability of the
business.
i)
Preparation of final
accounts: Cost accounting provides for perpetual inventory system. It helps
in the preparation of interim profit and loss account and balance sheet without
physical stock verification.
j)
Facilitates control: Cost
accounting includes effective tools such as inventory control, budgetary control
and variance analysis. By adopting them, the management can notice the deviation
from the plans. Remedial action can be taken quickly.