COST ACCOUNTING

COST ACCOUNTING
 Meaning
 Definition
 Elements
 Objectives
 Importance
 Advantages
 Disadvantages
MEANING OF COST ACCOUNTING

Cost accounting is the process of collecting information

about the costs incurred by a company's activities, assigning
selected costs to products and services and other cost
objects, and evaluating the efficiency of cost usage. Cost
accounting is mostly concerned with developing an
understanding of where a company earns and loses money,
and providing input into decisions to generate profits in the
future.
DEFINITION OF COST ACCOUNTING

• The Institute of Cost and Management Accountants

(ICMA) London has defined costing as the ascertainment of
costs. This includes the techniques and processes of
ascertaining costs.

• The Institute of Cost and Works Accountants of the U.K.

has defined cost accountancy as the “application of costing
and cost accounting principles, methods and technique to
the science, art and practice of cost control and
ascertainment of profitability as well as presentation of
information for the purpose of managerial decision-
making.”
 OBJECTIVE OF COST ACCOUNTING

• Determining selling price

• Controlling cost

• Providing information for decision making

• Ascertaining costing profit

• Facilitating preparation of financial and other statements.

IMPORTANCE OF COST ACCOUNTING
1. TO THE MANAGEMENT

• To determine product cost

The cost of the product is very important in cost
accounting. The total product cost and cost per unit of product
are important in making stock valuation, deciding price of the
product and managerial decision making.

• To facilitate planning and control of regular business

activities
The cost formulation in cost accounting system is oriented to
help in planning, control and decision-making. The
accumulation, classification and analysis of cost is done in such
a way as to help management decision regarding business
activities.
• Elimination of wastage
As it is possible to know the cost of product at every stage, it becomes
possible to check the forms of waste, such as time and expenses are in the
use of machine equipment and material.

• Helps in estimate
Costing records provide a reliable basis upon which tender and estimate
may be prepared.

• Helps in identifying unprofitable activities

With the help of cost accounting the unprofitable activities are identified,
so that the necessary correct action may be taken.

• To supply information for short and long run decisions.

Cost accounting system provides data for short and long run decisions of a
non-recurring nature. These decision generally involve high cost
commitment
2. THE EMPLOYEES
Worker have an interest to efficient costing systems
benefits employees through incentive plan. As a result
both productivity and earning capacity increase.
Advantages Of Cost Accounting
•Adequacy or Inadequacy of Selling Prices.
•Disclosure of profitable Products.
•Control of Material and Supplies.
• Maintenance of Proper Investment in Inventories.
•Correct Valuation of Inventories.
•Whether to Manufacture or Purchase from Outsiders.
•Control of Labour Cost.
•Use of Company-wide Wage Incentive Plans.
•Controllable and Uncontrollable Cost.
•Use of Standards for Measuring Efficiency.
•Reduction of Losses Due to Seasonal Conditions.
•Budgeting.
•Reliable Check on General Accounting.
Limitations of Cost accounting
• The system is more complex.
• It is expensive.
• Inapplicability of costing method and technique.
• Not suitable for small scale units.
• Lack of Accuracy.
• Lacks social Accounting.
• Need preparation of frequent reconciliation to verify accuracy.
• Duplication of Work.
• Use of Secondary Data.
• Lack of cooperation of employees.
• Does not control Cost by itself.
• It is based on estimation and previous data.
• It only bring out the cost of goods or services.
• It serves the information need of the management.
• Not useful for determining the tax liabilities.