Basic Concept of Cost Accounting:
Cost Accounting is a practice & process of cost through which costs are controlled using the application of accounting principle, process and rules to ascertain the profitability of business concern. It aims to capture costs of production by assessing the input costs of each steps of production as well as fixed costs. Cost Accounting is a specialized branch of accounting which deals with classification, recording, allocation, summation and reporting of current and prospective cost. According to R.N. Carter, "Cost accounting is a system of recording in accounts the materials used and labor employed in the manufacture of a certain commodity or on a particular job." Cost accounting provides the manager a configuration to examine day to day operation of the company. It also assists the manager in planning & decision making related to current operations and plan of future by providing detailed cost information.Hence, cost accounting helps the manager in decision making, both for day to day operation as well as long term planning i.e. strategic decision making. It deals with historic data but also futuristic in approach. Hence, the objective of cost Accounting is follows:
Cost finding - The amount of expenses incurred in producing goods or in rendering services are terms as cost. One of the main objectives of Cost Accounting is to find the cost of goods & services.
Cost planning & control- The aim of Cost Accounting is to identify the area where cost needs to be controlled and plan accordingly by using various methods of cost accounting. Company can maximize its profit by proper planning of cost control.
Cost analysis - Analyzing of cost is one of the core objective of Cost Accounting. Through cost analysis we can classify costs into profitable and non-profitable, controllable and non-controllable, relevant and non-relevant costs etc. This analysis helps the management in taking appropriate steps by which profit of the concern may be maximized.
Help in fixation of selling price- In Cost Accounting, costs are identified, analyzed and classified through which one can ascertain the selling price by adding required return. Deciding suitable selling price is a crucial step for organization's success.
Helps in management planning- Cost Accounting provides various information regarding costs which assist the manager in taking various decisions. These include assessment of past activity as well as in making future planning.
Importance of cost Accounting in academic curriculum
Cost Accounting is one of the most important parts for a business. Business/Company that adopts proper cost accounting succeeds and earns more profit as compared to their competitors. The main importance of Cost Accounting is to locate the efficiency & inefficiency in use of materials, labor and machine. It is beneficial not only tothe management but also to the employees, investors, consumers and Government as a whole. Some of the importance of Cost Accounting is mentioned below-
Classification & controlling of cost-Cost Accounting helps in classification of cost and income of every division according to their contribution to profit. Classification of costs helps in controlling the cost. Through this, effects of materials, idle time and breakdown of machinery can are analyzed which will help to minimize the cost without compromising the quality and maximize the profit of the Company. It can be done by applying various techniques such as standard costing, marginal costing and budgetary control etc.
Provide cost information - It gives idea regarding material cost, labor cost and overheads. It also bifurcates costs into variable cost, fixed cost, sunk cost; opportunity cost etc. which helps in determining cost of production, cost per unit and adequate selling price.
Disclosure of Profitable product- It analyzes each and every unit so that profitable unit & loss making unit can be identified. It helps the management in deciding either eliminate or control unprofitable unit and expand profitable units. This will help to improve the overall performance and profit of an organization.
Check the accuracy of Financial Accounting - Through cost reconciliation
Statement, accuracy of financial statement can be checked. It also identifies exact increase ordecrease in costs.
Decision making - Coat Accounting plays a vital role in decision making. Without proper Cost Accounting, decision may jump into dark like break-even point, bottle neck stock, PV ratio etc. Hence, Cost Accounting is very important in decision making.
Budgeting - Cost Accounting is a key factor in budgeting part. Now a day before start of any activity, detailed estimation of quantities and amounts are necessary for better performance. Through correct estimation Company can compare its actual performance from its budgeted one and may take remedial action in time to improve its performance.
Few important tips to solve problems of Cost Accounting:
Below are some of the tips which will help in solving Cost Accounting problems -
First, read the problem in detail to understand the type and concept of problem.
Secondly, identify the types of company/ firm and its nature i.e. whether it is manufacturing company of trading Co. and type of business it is doing. This may not be required in all kinds of problem.
Analysis of problem is one the most important part. Analyze the problem that is being asked so as to identify the requirement.
Identify the specific scenario with relation to each situation, if any
Ascertain Method of Cost Accounting which needs to be used to get the correct result.
From all the above, we can safely conclude that, Cost Accounting is an integral part of a Company and it can take the decision making to the next level.
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