Cost Accounting

The reporting and analysis of a company’s cost structure is known as cost accounting. Cost accounting is the process of allocating expenses to cost items, which often includes goods, services, and other activities of a company. Cost accounting is useful because it can indicate where a firm spends money, how much it earns, and where it loses money. The goal of cost accounting is to report, evaluate, and enhance internal cost controls and efficiency. 

Objectives of Cost Accounting

1. Cost Ascertainment- The main goal of cost accounting is to accumulate and determine the  costs. Costs are identified, assigned and ascertained for many cost objects in business.
2. Calculating the profit of each activity: The profit of every activity is determine by comparing its cost to its income. The aim of this step is to determine the costing profit or loss of any activity.
3. Cost control – To exercise cost control, the following steps should be taken which are given below. a) Standards or Results determined before starting a method. b) Actual Performance is measured. c) Compare the actual performance with set standard. d)Any Variance should be analyzed and further actions must be taken to rectify variance.
4. Determination of Selling Price- The cost accounting system helps in the dtermination of selling price and therefore, the profitability of a cost object. As external forces dictate selling prices in a competitive corporate setting, a cost accounting system offers a foundation for price determination and rate negotiation.
5. Assisting management in decision making: Cost and management accounting helps the management in planning, implementing, monitoring, managing, and evaluating different operations by giving appropriate information. A good cost and management accounting system offers information to the company internally and also to the outside world.

Essentials of a Good Cost Accounting System

1. Accuracy: The data which is used by the Cost Accounting System should be correct; otherwise, the system will reflect a false output, and improper decision will be made.
2. Consistency and uniformity: There should be consistency and uniformity in the classification, processing, and reporting of cost data and related information. This is necessary for comparability of the system’s results for horizontal as well as vertical analysis.
3. Informative and Simple: A cost accounting system must be tailored to the requirements of a company. A cost accounting system must be practical, simple, and capable of achieving the requirements of company. The usefulness of system must not be sacrificed, by incorporating thorough and needless information into the structure of pricing.
4. Flexible and adaptable: The cost accounting system must be adaptable enough to make needed adjustments to meet changes in technology, reporting, regulatory, and other requirements.
5. Integrated and inclusive: To have a comprehensive picture and clarity in outputs, the cost accounting system must be integrated with other systems like financial accounting, taxation, operational research, and statistics among others.

Limitations of Cost Accounting

1. Expensive: It is costly because analysis, allocation, and absorption of overheads demand a significant amount of additional effort and, as a result, additional money.
2. Reconciliation -Reconciliation is required because the results of cost accounts differ from those of financial accounts. As a result, reconciliation statements must be prepared in order to check their accuracy.
3. Duplication of Work: It involves duplication of work since the organization must keep two sets of records i.e., Financial and Cost Accounts.
4. Narrow Scope -Certain types of industries are unable to use modern costing procedures. There is no prescribed format of cost accounting that can be applied to all businesses. However, a customized version of the cost method can be used to meet the unique needs of a specific industry. A customized costing system must be designed to fit the business.
5. Unreliable – It is argued that cost accounting is dependent on assumptions and so cannot be trusted. But it’s not about estimates only when it comes to costing. Estimates in costing are based on scientific reasoning techniques and historical data. As a result, it’s quite close to reality. There are other situations where estimating is merely a process, such as tenders, standard cost fixing, and so forth. In today’s world, standard costing is frequently employed.

Types of Cost

1. Explicit Costs -Explicit costs are also known as out-of-pocket costs. They relate to expenses that must be paid in cash immediately. Salaries, wages, postage and telegram, interest on a loan, and other charges that require prompt cash payment are examples of explicit costs. These payments are easily measured since they are documented in the books of account.
2. Controllable costs: Controllable cost is defined as a cost that can be controlled, often by a cost, profit, or investment center manager. The conduct of the executive in charge of a particular responsibility center might have an impact on the controllable expenses incurred in that responsibility center. Direct costs, such as direct labor, direct material, direct expenses, and some overheads, are normally under the control of shop level management.
3. Uncontrollable Costs- Uncontrollable costs are those costs that cannot be controlled by the actions of a specific member of an undertaking. For example, money spent by the tool room can be controlled by the foreman in charge of that section, but the share of tool-room expenses assigned to the machine shop cannot be controlled by the foreman in charge of that section.
4. Implicit Cost – A cost which occurs without the exchange of money and is not documented for accounting purposes is known as an implicit cost. Implicit costs represent a reduction in income but not a reduction in profit. Explicit costs, on the other hand, indicate money traded or the use of actual resources by a corporation.

Conclusion

Cost accounting is a method of recording and assessing the costs of goods and services in order to assist in strategic planning and cost reduction. It is important for many stakeholders in a company, including management, employees, and customers. Despite their similarities, cost accounting and financial accounting provide different results. Financial accounting shows us the profit and loss for the firm as a whole, whereas cost accounting shows you the cost of manufacturing individual items. While employing a specialized cost accounting system has its advantages, a firm that is efficient enough to track its own expenditures can handle all of its data without one.