Understanding the Objectives of Cost Accounting

Understanding the Objectives of Cost Accounting

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Jaya
Jaya Sharma
Assistant Manager - Content
Updated on Oct 3, 2023 16:34 IST

Cost accounting is one of the three main branches of accounting. Considered as the subset of managerial accounting, it deals with the assessment of costs incurred in the manufacturing process.

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In this article, we will be focusing on the objectives of cost accounting and why this accounting branch is important.

Table of Contents

What is Cost Accounting?

Cost accounting is a branch of accounting. It consists of procedures to record and report the measurement of costs to manufacture products. This includes different methods to recognize, classify, aggregate, and report manufacturing costs and compare them with standard costs. Fixed costs, variable costs, direct costs, indirect costs, and operating costs are considered in cost accounting.

It is non-compliant with GAAP and is used for the internal purposes of the management to make business decisions. Due to this internal use, it is often considered to be a subset of management accounting. Cost accountants assess the variable cost of every step in the production and fixed costs. 

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Following are the different types of cost accounting:

  1. Standard Costing: This type of cost accounting assigns ‘standard’ costs instead of the actual cost to COGS and inventory. Standard costs are based on the efficient use of labour and materials for producing goods and services under standard operating conditions. 
  2. Lean accounting: The aim of lean accounting is to improve the financial management practices within an organization. The objective of cost accounting, in this case, is to minimize waste and enhance productivity. 
  3. Activity-Based Costing (ABC): This cost accounting is used for identifying overhead costs from every department and assigning them to specific cost objects. It is based on activities that are involved in the production, designing and distribution of finished products. 
  4. Marginal costing: Also known as cost-volume-profit analysis, it indicates impact on the cost of product by adding one additional unit into production. This helps management in identifying the impact of varying levels of costs and volume on operating profits. 

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Importance of Cost Accounting

This accounting branch is almost used by every organization to understand the cost of running a business. It is useful since companies can identify their earnings and areas as well as processes on which they are spending money. Based on the data, they can improve their internal cost controls which in turn improves the efficiency of the system.

As the world becomes more industrialized, manufacturing costs become more significant than the variable costs of products. Fixed costs are more significant for making decisions about products and pricing. One can also ascertain the costs of products, processes, contract, jobs using techniques such as job and process costing. 

Companies use cost accounting to define both variable and fixed costs associated with manufacturing costs. First of all, costs are individually calculated and reported. Then they compare input costs with product results to assess financial performance and make potential business decisions. 

Objectives of Cost Accounting

While we have understood the basics of cost accounting, let us now understand the objectives of cost accounting.

1. Selling price determination: One of the most important cost accounting objectives is determining the product’s cost. To decide the selling price, product cost and cost per unit of product are important. Rather than determining the selling price, it indicates what the selling price should be. In cost accounting, concept of perceived value is considered, whereas a customer’s willingness to spend on a product is considered. This helps in fixing the price of the product since it considers the customer value. 

2. Cost control: Cost accountants use various techniques such as standard costing, inventory, and budgetary control. Every item of cost is budgeted at the beginning of accounting periods. It is the process of regulating costs of operating an undertaking. Through cost control, the efficiency of the enterprise increases in turn. To achieve cost control, the following should be completed:

  • Fixing standards of performance
  • Collecting actual cost data for every area of responsibility
  • Comparing actual data with standards
  • Forwarding reports to management that highlight deviations from standards from the immediate corrective action

3. Making Operative Policies: Cost accounting provides thoroughly analysed cost data. This forms the basis for formulating policies about day-to-day business activities. Cost accountants provide important information to management so that they can formulate operative policies for:

  • Producing or purchasing a component
  • Determining cost volume profit relationship
  • Deciding on whether a loss-bearing operation should continue or shut down
  • Continuing or replacing existing machinery with economical equipment

Also read: What is Cost-Volume Profit Analysis?

4. Quicker preparation of financial statements: Through cost accounting, accountants can prepare financial statements within a shorter time period. Cost accountants offer periodic statements of accumulated costs with analysis. They also provide information on the stock of raw materials and furnished and semi-furnished goods.

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5. Ascertaining costing profit: Through cost accounting, analysts can ascertain whether an activity is costing profit or loss on an objective basis. This is made possible by matching cost with the revenue of the activity. 

6. Identifying wasteful practices: Businesses can identify unnecessary business expenditures by assessing costs incurred on different processes. This includes costs incurred on wasteful purchases that are not required. 

Conclusion

Cost accounting helps in assessing costs incurred in manufacturing and related business processes. This branch of accounting also helps in checking the accuracy of financial accounts using reconciliation of profit as per the financial accounts with profit as per cost account. Based on the data provided through cost accounting, companies can make better business decisions.  

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About the Author
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Jaya Sharma
Assistant Manager - Content

Jaya is a writer with an experience of over 5 years in content creation and marketing. Her writing style is versatile since she likes to write as per the requirement of the domain. She has worked on Technology, Fina... Read Full Bio