A Business Encyclopedia

Cost Accounting

Definition: Cost Accounting implies a branch of accounting which deals with recording, classifying, accumulation, allocation and control of the cost of production. It captures the incomes and expenditures and prepares statements and reports for the respective period, so as to determine and control costs.

It aims at keeping a record of the cost of production, by ascertaining input cost at each level of production including fixed cost such as rent and depreciation.

Objectives of Cost Accounting

  • Determination of Cost: To accumulate, allocate and ascertain cost for each cost object is the primary objective of the cost accounting.
  • Basis for fixing selling prices: As the prices of the cost object, i.e. the product is determined by the external factors such as market demand for the product, competitor’s price, etc. However, the basis for ascertaining the price is the total cost of production and the cost accounting techniques helps in determining it.

    Along with that, it acts as a guide for estimating prices for tender and quotations.

  • Cost Control: Another important objective of the cost accounting system is to control the costs. It keeps a check on the expenses made by the company, against the set standards and the deviations are recorded and reported continuously.
  • Cost Reduction: The management works to further reduce the cost to increase the profitability of the company. Cost reduction implies the actual and permanent reduction in the cost of production without compromising with the quality and the suitability of its desired use.
  • Determination of Closing Inventory: To ascertain the value of closing inventory at the end of the period for the preparation of financial statements of the concern.
  • Assisting Management: To report to the management about the inefficiencies of the workers and eliminates wastes like material, expenses, equipment, tools and so forth.

    It also ensures optimum utilization of resources of the organization by making sure that no machines are left idle, the workers get incentives for their performance, proper utilization of by-products and so forth.

  • Economies of Production: To reflect different sources of economies of scale, concerning the process, type of equipment, inputs used, the output generated etc.

Cost Accounting is useful in reaching the cost of production of every unit, process, job and operation. It also assists the management in making a comparison between the actual cost and the estimated cost. Further, it also provides data on periodic intervals, i.e. weekly, monthly or quarterly, with respect to the profit and loss of the entity to estimate future profitability.

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