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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.
Question for Nature and functions of cost accountingTry yourself: What distinguishes cost accounting as a branch of knowledge?View Solution
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.
Question for Nature and functions of cost accountingTry yourself: What is the primary purpose of cost accounting?View Solution
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FAQs on Nature and functions of cost accounting - Commerce & Accountancy Optional Notes for UPSC
| 1. What is the nature of cost accounting? |  |
Ans. Cost accounting is a branch of accounting that focuses on recording, analyzing, and controlling the costs incurred by a business. It involves the collection and analysis of financial data related to the various activities of a company. The nature of cost accounting is to provide management with accurate and relevant information about costs, so that they can make informed decisions to improve efficiency, control expenses, and increase profitability.
| 2. What is the scope of cost accounting? | |
Ans. The scope of cost accounting is vast and covers various aspects of a business. It includes the determination and analysis of costs for different products, processes, or activities. Cost accounting also involves the estimation of costs for future projects, budgeting, and cost control. Additionally, it encompasses the preparation of cost reports, variance analysis, and decision-making support for management. The scope of cost accounting extends to all levels of an organization, from top management to operational levels.
| 3. What are the functions of cost accounting? | |
Ans. The functions of cost accounting are as follows:
1. Cost Ascertainment: The primary function of cost accounting is to ascertain and determine the cost of producing goods or providing services. It involves the collection, classification, and analysis of cost data to determine the actual cost incurred.
2. Cost Control: Cost accounting helps in controlling costs by comparing actual costs with budgeted costs and identifying variances. It enables management to take corrective actions and implement cost-saving measures to optimize resources.
3. Cost Planning: Cost accounting assists in cost planning by providing information on the cost structure of different products or services. It helps in setting realistic targets and formulating effective strategies to achieve them.
4. Decision Making: Cost accounting plays a crucial role in decision-making processes. It provides relevant cost information to management, enabling them to make informed decisions regarding pricing, product mix, make or buy decisions, and investment appraisal.
5. Performance Evaluation: Cost accounting helps in evaluating the performance of various departments, products, or activities within an organization. It enables the comparison of actual costs with standard costs or budgeted costs, facilitating performance measurement and analysis.
| 4. How does cost accounting contribute to improving efficiency? | |
Ans. Cost accounting contributes to improving efficiency in several ways:
1. Identification of Cost Drivers: Cost accounting helps in identifying the key cost drivers, which are the activities or factors that significantly influence costs. By understanding these drivers, management can focus on improving efficiency in those areas to reduce costs.
2. Cost Analysis: Cost accounting provides detailed information on the costs incurred at different stages of production or service delivery. By analyzing these costs, management can identify areas of inefficiency, such as excessive wastage, idle resources, or inefficient processes. This analysis enables them to take corrective actions to improve efficiency.
3. Budgeting and Variance Analysis: Cost accounting involves the preparation of budgets and the comparison of actual costs with budgeted costs. Variance analysis helps in identifying the reasons for deviations from the budget and taking appropriate measures to improve efficiency.
4. Cost-Volume-Profit Analysis: Cost accounting enables the application of cost-volume-profit analysis, which helps in determining the breakeven point, target sales volume, and profit margins. This analysis assists management in making pricing decisions and optimizing resource utilization to improve efficiency.
5. Continuous Improvement: Cost accounting promotes a culture of continuous improvement by providing regular cost reports and performance evaluations. This encourages management and employees to identify areas for improvement and implement measures to enhance efficiency.
| 5. How does cost accounting support decision making in an organization? | |
Ans. Cost accounting supports decision making in an organization in the following ways:
1. Pricing Decisions: Cost accounting provides information on the cost structure of different products or services. This information helps management in setting appropriate prices by considering the cost incurred, desired profit margins, and market demand.
2. Product Mix Decisions: Cost accounting assists in determining the profitability of different products or services. By analyzing the costs and contribution margins of various products, management can make decisions regarding product mix optimization and resource allocation.
3. Make or Buy Decisions: Cost accounting provides relevant cost information for comparing the costs of producing a particular product or service in-house versus outsourcing it. This information helps management in making informed decisions regarding whether to make or buy a particular component or service.
4. Investment Appraisal: Cost accounting plays a vital role in investment appraisal by providing information on the costs, benefits, and expected returns of potential investment projects. This information helps management in evaluating the viability and profitability of investment opportunities.
5. Cost Reduction Decisions: Cost accounting assists in identifying areas of inefficiency and high costs within the organization. By providing cost analysis and variance reports, management can make decisions to reduce costs, eliminate wastage, and improve overall financial performance.
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Nov 21, 2024 Last updated |
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