KAMPALA INTERNATIONALUNIVERSITY

COLLEGE OF ECONOMICS AND MANAGEMENT

NAME : KIRUNGI MORREEN

REG NO : 2019-08-09998

COURSE : BBA/FA

COURSE CODE : ACC 2203

COURSE UNIT : COST ACCOUNTING

YEAR : TWO

SEMESITER : TWO

LECTURER : DR. KIBIRIGE ALI

SESSION : DAY

QUESTION

Cost accounting is a system of foresight and not post mortem examination. It turns
losses into profits, speeds up activities and eliminates waste. Discuss.
Whatever business may be, cost accounting involves expenditure on labour, materials
and other items required for manufacturing and disposing of the product. Big business
requires delegation responsibility, division of labour and specialisation hence speeding
up the activities.

Management reduces the possibility of waste at each stage, it ensures that no machine
remains idle, efficient labour gets due initiative, proper utilisation of by-products is
made and costs are properly ascertained and in this case waste is eliminated. The
various advantages derived by managements on account of a good costing system can
be put as below:

 Cost accounting helps in periods of depression and competition :

In times of trade depression the business cannot afford to have leakages which pass
unchecked. The management should know where economies may be sought, waste
eliminated and efficiency increased. The business has to wage a war for its survival. The
management should know the actual cost of their products before embarking on any
scheme of reducing the prices or giving tenders. Costing system facilitates this.

 It is also used in pricing decisions :

Though economic law of supply and demand and activities of the competitors, to a great
extent, determine the price, cost to the producer does play an important part. The
producer can take necessary guidance from his costing records.

 Cost accounting helps in estimates :

Adequate costing records provide a reliable basis upon which tenders and estimates
may be prepared. The chances of losing a contract on account of over-rating or the loss
in the execution of a contract due to under-rating can be minimised. Thus, ascertained
costs provide a measure for estimates, a guide to policy, and a control over current
production.

 Helps in channelizing production on right lines :

Costing makes possible for the management to distinguish between profitable and non-
profitable activities. Profits can be maximised by concentrating or profitable operations
and eliminating non-profitable ones thus turning losses into profits.

 Used in reducing wastage :

As it is possible to know the cost of the article at every stage, it becomes possible to
check various forms of waste, such as of time, expense etc., or in the use of machinery,
equipment and tools.

 Provides information for periodical profit and loss accounts :

Adequate costing records supply to the management such data as may be necessary for
preparation of profit a loss account and balance sheet, at such intervals as may be
desired by the management. It also explains in detail the sources of profit or loss
revealed by the financial accounts, thus helps in presentation of better information
before the management.

 Costing results into increased efficiency :

Losses due to wastage of materials, idle time of workers, poor supervision etc. will be
disclosed if the various operations involved in manufacturing a product are studied by a
cost accountant. The efficiency can be measured and costs controlled and through it
various devices can be framed to increase the efficiency.

 It makes comparison possible:

If the costing records are regularly kept, comparative cost data for different periods and
various volumes of production will be available. It will help the management in forming
future lines of action.

 Costing helps in inventory control and cost reduction :

Costing furnishes control which management requires in respect of stock of materials
work-in-progress and finished goods. Costs can be reduced in the long-run when
alternates are tried. This is important in the present-day content of global competition.

 Cost accounting helps in increasing productivity :

Productivity of material and labour is required to be increased to have growth and
 more profitability in the organisation. Costing renders great assistance in measuring
productivity and suggests ways to improve it.

Furthermore, cost accounting advantages

 Trend analysis

Costs can be tracked on a trend line to discover expense surges that may be indicative of
long-term trends.

 Modeling

Costs can be modeled at different activity levels. For example, if management is

contemplating the addition of a second shift, cost accounting can be used to derive the
additional costs associated with that shift.

 Acquisitions

The cost structures of possible acquisition candidates can be examined to see if costs
can be pruned in some areas, thereby justifying the cost of the acquisition.

 Budget compliance

Actual costs incurred can be compared to budgeted or standard costs, to see if any part
of a business is spending more than expected.

 Cost object analysis

Revenues and expenses can be clustered by cost object, such as by product, product line,
and distribution channel, to determine which ones are profitable or require further
support.

 Capacity

The ability of a business to support increased sales levels can be examined by exploring
the amount of its excess capacity. Conversely, equipment that is idle can be sold off,
thereby reducing the asset base of the organization.

 Outsourcing

One can determine whether certain tasks or processes should be handled in-house or
outsourced, based on an analysis of the relevant costs.
References

Vanderbeck, Edward J. (February 2012). Principles of Cost Accounting - Edward J.

Vanderbeck - Google Books.ISBN 978-1133187868.
Horngren, Datar and Foster, Cost Accounting - A Managerial Emphasis, 11th edition
(Prentice Hall 2003).
Kaplan, Robert S. and Bruns, W. Accounting and Management: A Field Study Perspective
(Harvard Business School Press, 1987) ISBN 0-87584-186-4
Nicholson, Jerome Lee, and John Francis Deems Rohrbach. Cost accounting. New York:
Ronald Press, 1919.