Cost Accounting


Cost Accounting is very important for any organization. It helps management in different fields one of such fields is the presentation of information in the most useful manner. Cost Accounting is the method of measuring, analyzing or estimating the costs. Profitability and Performance of individual products, departments and other segments of an organization, for either internal or external or both and to report to the interested parties. Cost Accounting is concerned with the synthesis and analysis of costs. Its purpose in the modern days is to help management in the twin functions of the decision- making and control. Cost Accounting is not just finding the cost but it is advising the management, planning and control of the organization and business operations. AS per the Act certain companies have to maintain cost accounting records and accounts and conduct the audit of cost accounts. A cost accounting system when installed will result in the following: –

  1. Cost Accounting reveals areas where materials were used excessively, labour operated inefficiently and expenses incurred exorbitantly.
  2. It suggests a cost reduction programme. A continuous cost along with technical personnel seeking areas for effecting cost reduction brings beneficial results.
  3. Cost account locates the specific causes for the variations in profit. It points out the losing product or operations. It indicates reasons for the loss and suggests remedial measures in time.
  4. It provides suitable data for management to select the best alternatives. It may be to decide whether to buy or make a part, to operate Machine X or Y, to accept or reject an order below cost.
  5. Cost accounts provide us with the actual cost for price fixation. True demand and supply play a vital role in fixing price. But the cost is an essential guide here.
  6. It provides vital data to till in tenders. Tenders filled in with the help of marginal costing technique are successful.
  7. Standard costing and budgetary control lead to maximum efficiency.
  8. Cost comparison helps cost control. Such comparison may be between different periods of the same department or comparable operations of different units.
  9. Cost data are useful to outside agencies like Government, Tribunals, etc., for taking decisions on tariff regulations, settlement of disputes, variations in wage levels etc.
  10. It helps assist overcoming capacity utilization crises.
  11. Marginal costing helps take suitable short term decisions in times of trade depression.
  12. Cost Accounting lays down cost centres and responsibility centres which ensures proper organizational structure.
  13. Cost accounting provides for perpetual inventory system. This enables inventory control and preparation of short term profit and loss accounts.
  14. Cost of closing stock of raw materials, work in progress and finished products are readily available in cost records. All organizations will not get all the advantages listed above. However, an efficiently operated costing system with full support from management can reap most of them.