What is Cost Accounting?
By quantifying both the variable and fixed costs of each production phase, such as a leasing expense, cost accounting aims to determine the entire cost.
Businesses were compelled to begin tracking their fixed and variable costs throughout the Industrial Revolution due to new global supply and demand economies to automate their production processes.
A company’s internal management department will employ cost accounting to determine the variable and constant costs involved with a manufacturing process. These costs will be calculated and reported separately, then compared to production outcomes to evaluate financial performance and make prospective business decisions.
Below is a list of cost types that are included in cost accounting.
- Costs that cannot be changed – Fixed Cost
- Costs of operation- Operating costs
- Costs incurred in the form of direct- Direct costs
- Costs that change with time- Variable costs
- Costs incurred in a non-direct manner- Indirect costs
Cost Accounting vs Financial Accounting Difference:
- While outside investors or creditors typically utilise financial accounting, cost accounting is sometimes used to assist management in making decisions within a corporation.
- As part of financial accounting, a corporation’s sales, expenditures, assets, and liabilities are disclosed in financial statements to external parties.
- Using cost accounting for budgeting and expense reduction can boost a company’s net profits in the future by reducing costs.
- Whereas expenses are classified based on the types of transactions in financial accounting (costing), they are classified in cost accounting based on the management’s information needs.
Different ways of Accounting for Costs:
- Workflow-Based Costing (WBC)
- It’s time to go lean in accounting
- Marginal Costing
Cost Accounting: Its Scope and Function
It became increasingly important to keep track of costs as businesses expanded. As a result, cost accounting has gone a long way from focusing solely on variable costs to incorporating fixed expenses.
Cost accounting has a wide range of applications. However, 3 aspects are the most important:
- Cost estimation– It is one of the most important criteria in cost accounting. Cost estimation is the process of collecting and analysing expenses. Production of different products at different stages is linked to such costs.
Example- You can use the historical cost, real cost, and so on as examples of this cost type. Furthermore, these expenses can be linked to the production process using various methods, including direct and indirect costs.
- Cost Accounting– Accounting for costs is almost as important to management as accounting for profits. As a result, they can make decisions. It is also necessary to reconcile the cost accounting and financial recording accounts at year-end if they are separate.
- Control of costs-Controlling costs and expenses reduces expenditures and costs to increase profitability and efficiency. The goal is to get the actual numbers as close as possible to the target or budgeted statistics. Therefore, any costs that depart from the target must be regulated.
Functions of Cost Accounting
A firm’s whole cost structure can only be understood by using cost accounting. It determines the costs of different items, procedures, etc.
- Examine each product’s cost per unit to determine whether there are any wastes in terms of material or expense or time or tools and spare parts etc.
- As well, offer solutions to reduce this wastage and provide data that aids in price-fixing the profitability of each of the company’s products. Then, work out how to maximise these gains.
- Controlling raw material costs, ordering, and delivery is also part of cost accounting’s scope of responsibility. As a result, it must ensure that we don’t overorder, resulting in unnecessarily locked up capital.
- Decreased production efficiency is another consequence of underordering, as is the inability to manage costs effectively.
- Manage costs for materials, labour, and other extraneous expenditures and give the management enough information to evaluate and make business decisions.
- The creation of efficiency-based incentive systems for the management
- Assisting the management with budget formulation and implementation of financial controls
Objectives of Cost Accounting’s
To determine the costs of items or services through cost accounting, expenses are classified, recorded, and appropriately allocated. In addition, it facilitates the presentation of organised data to control and guide the management. Producing, selling and distributing costs are included in cost accounting. Each project, order, product, process, or service must be costed out to determine the cost. In this section, we will explore the various Cost Accounting Objectives.
- Establishing the cost per unit for different products that a company manufactures.
- Process and operating costs need to be accurately analysed.
- Sources of material, time, expense, or equipment waste must be disclosed, and the preparation of reports may be required to control such waste.
- Help determine the price of products or services by providing the necessary information.
- Calculate the profitability of each product and assist the management in maximising these profits.
Ensure that raw materials, work in progress, consumables and finished goods are well managed so that the capital invested in them is kept to a minimum.
- Preparation and interpretation of data for management planning and decision-making, as well as control.
- Involvement in the preparation and implementation of budgets.
Benefits of using cost accounting
- Profitable and non-profitable activities are both disclosed.
- Future production policies will be guided by these recommendations.
- Profit and loss figures are calculated at regular intervals.
- Material and supply chain management
- Different employees’ relative productivity
- Comparison that is reliable
Features of a Cost Accounting System
- A company’s costing system must be tailored to the nature and scale of its business, as well as its information requirements.
- The Costing System must be cost-effective for the organization, with the system’s benefits outweighing its installation and operational costs.
For a costing system to be optimum, it must offer the firm the greatest advantages and benefits. Therefore, the following are some of the most important features of a costing system that must be present to be considered perfect.
FAQs About Cost Accounting
✅ Saving money on costs is the same thing as controlling costs and reducing costs. Which of the following statements is true and which is false?
Ans: This is not true. The goal of cost control is to keep costs within budget and standards. Reducing a product’s unit cost without degrading its quality is the goal of cost reduction.
✅ Where can I find out more about cost accounting?
Accounting for costs When it comes to a class of companies that have been notified under the terms of Companies Act 1956, Record Rules are the prescribed details by the Central Government.
✅ What is the main purpose of cost accounting?
Cost-cutting measures: To make business decisions, management relies on cost accounting since it allows them to predict the cost price and the selling price of a product. Management can develop strategies to control expenses to maximise profitability using cost value as a reference point.