Nature and functions of cost accounting | Commerce & Accountancy Optional Notes for UPSC PDF Download

Nature of Cost Accounting

• Branch of Knowledge:
  • Cost accounting, while often seen as a part of financial accounts, is an essential field of knowledge in its own right.
  • It comprises distinct principles, concepts, and conventions, which may vary across different industries.
• Science Aspect:
  • Cost accounting is regarded as a science due to its systematic knowledge covering various subjects like law, office practices, data processing, production, and material control.
  • While it shares similarities with a natural science, it is not a perfect science.
• Artistic Element:
  • Involves a level of artistry, as cost accountants need skills to apply principles, methods, and techniques to address management problems.
  • This includes tasks like determining costs, cost control, and assessing profitability.
• Professional Field:
  • Evolving into a recognized profession, cost accounting has become more challenging.
  • Notable in the establishment of professional bodies like the Institute of Cost Accountants in India, ICMAI in the USA, and the Institute of Cost and Management Accountants in the UK.
  • The growing enrollment of students in these institutes highlights the increasing awareness and demand for expertise in cost accounting as a profession.

Scope of Cost Accounting

• The term "scope" in this context refers to the field of activity. Cost accounting involves determining the cost of a specific product or activity, providing valuable data for both internal and external reporting. Internal reports present summarized cost data, such as the cost of manufacturing each electrical product.
• To ensure that cost accounting meets the needs of both internal and external reporting, various activities are undertaken within the system:
  • Cost Determination: The initial step involves determining the cost for a particular product or activity, which is crucial as subsequent activities depend on this.
  • Cost Recording: Involves recording costs in the cost journal and posting them to the ledger. Cost recording can follow either an integral or non-integral system, maintaining a separate set of books for costing and financial transactions.
  • Cost Analyzing: Focuses on critically evaluating cost information to assist management in planning and controlling business activities. Effective cost analysis relies on a clear understanding of the cost finding methods used in cost accounting.
  • Cost Reporting: Involves reporting cost data for both internal and external purposes. To intelligently use cost information, managers need a good understanding of various cost accounting concepts.

Function of Cost Accounting

According to Blocker and Weltemer, "Cost Accounting serves management in executing policies and comparing actual and estimated results to appraise the value of each policy and adjust for future conditions." 

The primary functions of cost accounting include:

• To serve as a guide to price fixing of products.
• To disclose sources of wastage in process of production.
• To reveal sources of economy in production process.
• To provide for an effective system of stores, materials etc.
• To exercise effective control on factors of production.
• To ascertain the profitability of each product.
• To suggest management of future expansion policies.
• To present and interpret data for management decisions.
• To organize cost reduction programmes.
• To facilitate planning and control of business activity.
• To supply timely information for various decisions.
• To organize the internal audit systems etc.