Cost Accounting - Meaning, Objectives & Functions, Nature and Scope [Cost Accounting Notes BCOM]


Cost Accounting Meaning

Cost: The term ‘cost’ has to be studied in relation to its purpose and conditions. As per the definition by the Chartered Institute of Management Accountants (C.I.M.A.), London ‘cost’ is the amount of actual expenditure incurred on a given thing.

Costing: The C.I.M.A., London has defined costing as the ascertainment of costs. “It refers to the techniques and processes of ascertaining costs and studies the principles and rules concerning the determination of cost of products and services”.

Cost Accounting: It is the method of accounting for cost. The process of recording and accounting for all the elements of cost is called cost accounting. I.C.M.A. has defined cost accounting as follows: “The process of accounting for cost from the point at which expenditure is incurred or committed to the establishment of its ultimate relationship with cost centers and cost units. In its widest usage it embraces the preparation of statistical data, the application of cost control methods and the ascertainment of the profitability of activities carried out or planned”.

Cost Accountancy: The term ‘Cost Accountancy’ includes Costing and Cost accounting. Its purposes are Cost-control and Profitability – ascertainment. It serves as an essential tool of the management for decision-making.

I.C.M.A., has defined cost accountancy as follows: “The application of costing and cost accounting principles, methods and techniques to the science, art and practice of cost control and the ascertainment of profitability. It includes the presentation of information derived there from for the purpose of managerial decision making”.


Objectives/functions of Cost Accounting

According to Blocker and Weltemer, “Cost Accounting is to serve management in the execution of polices and in comparison of actual and estimated results in order that the value of each policy may be appraised and changed to meet the future conditions”. The main objectives/functions of cost accounting are:

1) Ascertain Cost: To ascertain the cost of product or a services reveled and enable measurement of profit by proper valuation of inventory.

2) Analyse Costs: To analysis costs or to classify the expenses under different heads of accounts viz. material, labour, expenses etc.

3) Allocate and Apportion the Costs: To allocate or charge the direct expenses or specific costs such as Raw Material, Labour to particular product, contract or process and to distribute common expenses to each product, contract or process on a suitable basis.

4) Cost Reporting: Cost Reporting or presentation includes:

a) What to report i.e. what is the nature of information to be presented?

b) Whom to Report i.e. to whom the report is to be addressed.

c) When to Report i.e. when the report is to be presented i.e. Daily weekly monthly yearly etc.

d) How to Report i.e. in what format the report is to be presented.

5) Assist the Management: Cost Accounting assist the management in the following ways

a) Indicate to the management any inefficiencies and extent of various forms of waste of Raw Material, Time, Expenses etc.

b) Help the management in fixing of selling price.

c) Provide information to enable management to take decision of various types.

6) Cost Control: Cost Accounting assist the management in cost control. Cost control includes the following stages.

a) Setting up of targets of cast and production for each period.

b) Measuring the actual figures of performance relating to cost, production etc. for the period concerned.

c) The figures of actual performance are to be compared with the targets to find out the variation. d) Analysing the variance, whether favourable or adverse. e) Immediate action has to be taken in case of adverse variation.

7) Controlling Inventory: Assist the management in controlling Inventory of Raw Material, goods in process, finished goods, spares and consumables etc.

8) Optimum Product Mix: Advise the management in deciding optimum product mix merits and demerits of alterative courses of action viz. make of buy decisions, introduction or Automation mechanization, rationalization, system of production etc.

9) Future Policies: Advise management on future policies regarding Expansion, growth, capital investment, etc.  

Nature of Cost Accounting

The nature of cost accounting can be brought out under the following headings:

1.  Cost accounting is a branch of knowledge: Though considered as a branch of financial accounts, cost accounting is one of the important branch of knowledge, i.e., a discipline by itself. It is an organised body of knowledge consisting of its own principles, concepts and conventions. These principles and rules vary from industry to industry.

2. Cost accounting is a science: Cost accounting is a science as it is a body of systematic knowledge relating to not only cost accounting but relating to a wide variety of subjects such as law, office practice and procedure, data processing, production and material control, etc. It is necessary for a cost accountant to have intimate knowledge of all these field of study in order to carry on his day-to-day activities. But it is to be admitted that it is not a perfect science as in the case of natural science.

3. Cost accounting is an art: Cost accounting is an art in the sense it requires the ability and skill on the part of cost accountant in applying the principles, methods and techniques of cost accountancy to various management problems. These problems include the ascertainment of cost, control of costs, ascertainment of profitability, etc.

4. Cost accounting is a profession: In recent years cost accounting has become one of the important professions which have become more challenging. This view is evident from two facts. First, the setting up of various professional bodies such as the Institute of Cost accountant in India, ICMAI in USA and the institute of cost and management Accountants in UK. Such professional bodies both in developed and developing countries have increased the growing awareness of costing profession among the people. Secondly, a large number of students have enrolled in these institutes to obtain costing degrees and memberships for earning their livelihood.


Scope of Cost Accounting

The term scope here refers to field of activity. Cost accounting refers to the process of determining the cost of a particular product or activity. It provides useful data both for internal and external reports reporting. Internal reporting presents details of cost data in a summarized and aggregate form. For instance, in case a company manufacturing electrical goods cost of each product.

In order that cost accounting satisfies the requirements of both internal and external reporting, the following are the different activities which are undertaken under cost accounting system:

a) Cost Determination: This is the first step in the cost accounting system. It refers to determining the cost for a specific product or activity. This is a critical activity since the other three activities, explained below, depend on it.

b) Cost Recording: It is concerned with recording of costs in the cost journal and their subsequent posting to the ledger. Cost recording may be done according to integral or non-integral system a separate set of books is maintained for costing and financial transactions.

c) Cost Analyzing: It is concerned with critical evaluation of cost information to assist the management in planning and controlling the business activates. Meaningful cost analysis depends largely upon the clear understanding of the cost finding methods used in cost accounting.

d) Cost Reporting: It is concerned with reporting cost data both for internal and external reporting purpose. In order to use cost information intelligently it is necessary for the managers to have good understanding of different cost accounting concepts.

Also Read: Important Questions for Upcoming Exams

Unit – 1: Basic Concept of Cost Accounting (Part A) and Cost Sheet (Part B)
(These Questions are subject to modification, if necesary. Download DTS Application for complete notes)

Q. What is Cost accounting? Discuss briefly the nature (2010) and objectives (2011) of Cost accounting. 2023

Q. What are the advantages and limitations of cost accounting?               2019

Q. “Cost accounting is an essential tool to the Management” –Comment.            2011, 2012

Q. Distinguish and also mention the relationship between

Ø  Cost accounting and Financial accounting   2013SN,2016SN, 2018SN

Ø  Cost accounting and Management Accounting

Q. “Cost accounting is better understood as a cost control and cost reduction exercise and not mere a cost ascertainment process”. Considering this statement explain the scope of cost accounting.           2010

Q. What are the steps involved in installing a costing system. Mention the problems faced by a manufacturing unit in installing such a system. What are the essentials of an effective costing system?              2012, 2014

Q. Explain the role and functions of cost accountant.

Q. What do you understand by cost classification? Discuss the various bases of classification of costs and various types of costs.     2015, 2016SN, 2017

Q. Explain the purposes of classification of costs. Distinguish between direct cost and indirect cost.   2022, 2023

Q. Write Short notes on:

Ø  Cost sheet or Statement of Cost       2017SN

Ø  4 Methods of Cost accounting

Ø  4 Techniques of Cost accounting   2019SN

Ø  Cost centre and Cost Unit

Ø  Characteristics of an Ideal Costing System

Or

Unit 1: Part B (Practical)

Practical Problems:

a) Cost sheet focusing on valuation of stock of finished goods, keep in mind expenses ignored in cost accounts, preparation of cost sheet from financial records (refer unit 4 – Reconciliation), profit percentages given on cost price or sale price.          Every year

b) Follow 28 solved questions uploaded on my blog

c) Follow examples of BASU AND DAS COST ACCOUNTING BOOK.

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