Cost accounting, thus, provides various information to management for all sorts of decisions.It serves multiple purposes on account of which it is generally indistinguishable frommanagement accounting or so-called internal accounting. Wilmot has summarized the natureof cost accounting as “the analyzing, recording, standardizing, forecasting, comparing,reporting and recommending” and the role of a cost accountant as “a historian, news agentand prophet.” As a historian, he should be meticulously accurate and sedulously impartial. Asa news agent, he should be up to date, selective and pithy. As a prophet, he should combineknowledge and experience with foresight and courage.
Objectives of Cost Accounting
The main objectives of cost accounting can be summarized as follows:
1. Determining Selling Price
Business enterprises run on a profit-making basis. It is, thus, necessary that revenueshould be greater than expenditure incurred in producing goods and services from whichthe revenue is to be derived. Cost accounting provides various information regarding thecost to make and sell such products or services. Ofcourse, many other factors such as thecondition of market, the area of distribution, the quantity which can be supplied etc. arealso given due consideration by management before deciding upon the price but the cost plays a dominating role.
2. Determining and Controlling Efficiency
Cost accounting involves a study of various operations used in manufacturing a productor providing a service. The study facilitates measuring the efficiency of an organization asa whole or department-wise as well as devising means of increasing efficiency.Cost accounting also uses a number of methods, e.g., budgetary control, standard costingetc. for controlling costs. Each item viz. materials, labor and expenses is budgeted at thecommencement of a period and actual expenses incurred are compared with budget. Thisgreatly increases the operating efficiency of an enterprise.
3. Facilitating Preparation of Financial and Other Statements
The third objective of cost accounting is to produce statements whenever is required bymanagement. The financial statements are prepared under financial accounting generallyonce a year or half-year and are spaced too far with respect to time to meet the needs of management. In order to operate a business at a high level of efficiency, it is essential for management to have a frequent review of production, sales and operating results. Costaccounting provides daily, weekly or monthly volumes of units produced andaccumulated costs with appropriate analysis. A developed cost accounting system provides immediate information regarding stock of raw materials, work-in-progress andfinished goods. This helps in speedy preparation of financial statements.
4. Providing Basis for Operating Policy
Cost accounting helps management to formulate operating policies. These policies mayrelate to any of the following matters: