Cost Accounting is a term used in management accounting to track and analyze the costs incurred in the production process of goods or services.
It involves collecting, recording, and analyzing various types of costs to provide valuable information for decision-making purposes.
The main goal of Cost Accounting is to determine the true cost of producing a product or service, taking into account both direct and indirect costs. Direct costs include things like raw materials and direct labour, which can be easily attributed to the production process. Indirect costs, on the other hand, are not directly tied to a specific product or service but still need to be allocated to determine the overall cost.
Cost Accounting plays an important role in providing businesses with insights into their expenses and performance. It helps identify areas where costs can be reduced or controlled, ultimately leading to increased efficiency and profitability.
Definition of Cost Accounting
Cost Accounting may be defined as “Accounting for costs classification and analysis of expenditure as will enable the total cost of any particular unit of production to be ascertained with reasonable degree of accuracy and at the same time to disclose exactly how such total cost is constituted”.
Thus Cost Accounting is classifying and recording an appropriate allocation of expenditure for the determination of the costs of products or services and for the presentation of suitably arranged data for the purpose of control and guidance of management.
Objectives of Cost Accounting
The primary objectives of cost accounting are as follows: –
(a) Ascertainment of cost: The main objective of Cost Accounting is to accurately determine the true cost of producing a product or service. This means considering both direct costs like raw materials and labor directly involved in production, and indirect costs, which may not be directly linked to a specific product but still impact the overall cost. Cost accounting helps to determine the cost of products, services, or activities. This information can be used to set prices, control costs, and make other decisions.
(b) Cost control: Cost accounting can be used to identify areas where costs can be reduced. This can help to improve profitability and efficiency.
(c) Profit planning: Cost accounting can be used to forecast costs and revenues. This information can be used to make decisions about pricing, production, and marketing.
(e) To provide a basis for operating policies, such as the determination of Cost Volume relationship, whether to close or operate at a loss, whether to manufacture or buy from the market, whether to continue the existing method of production or to replace it with a more improved method….etc.
f) Decision-making: Cost accounting can provide information that can be used to make decisions about a variety of matters, such as product mix, plant location, and pricing.
How Cost Accounting Works – An Example
Here is an example of how cost accounting can be used:
A company manufactures two products, A and B. The company uses job costing to determine the cost of each product. The company’s cost accountant collects data on the materials, labour, and overhead costs incurred for each product. The cost accountant then uses this data to calculate the cost of each product.
The company’s management can use this information to make decisions about pricing, production, and marketing. For example, the company might decide to increase the price of product A if its cost is higher than the cost of product B. The company might also decide to reduce production of product B if its cost is higher than the company’s target cost.