Cost Accounting: Objectives, Importance, and Scope

Cost Accounting

Cost Accounting is a branch of accounting and has been developed due to limitations of financial accounting. Financial accounting is primarily concerned with record keeping directed towards the preparation of Profit and Loss Account and Balance Sheet. It provides information regarding the profit and loss that the business enterprise is making and also its financial position on a particular date. The financial accounting reports help the management to control in a general way the various functions of the business but it fails to give detailed reports on the efficiency of various divisions. The limitations of Financial Accounting which led to the development of cost accounting

Objectives of Cost Accounting

1. To analyse and classify all expenditure with reference to the cost of products and operations
2. To arrive at the cost of production of every unit, job, operation, process, department or service and to develop cost standard.
3. To indicate to the management any inefficiencies and the extent of various forms of waste, whether of materials, time, expenses or in the use of machinery, equipment and tools
4. To provide data for periodical profit and loss accounts and balance sheets at such intervals
5. To provide actual figures of costs for comparison with estimates and to serve as a guide for future estimate

Cost Accounting and Financial Accounting

Both financial accounting and cost accounting are concerned with systematic recording and presentation of financial data. Financial accounting reveals profits and losses of the business as a whole during a particular period, while cost accounting shows, by analysis and localization, the unit costs and profits and losses of different product lines. Financial accounting aims at safeguarding the interests of the business and its proprietors and others connected with it. Cost accounting, on the other hand, renders information for the guidance of the management for proper planning, operation, control, and decision making. Financial accounts are kept in such a way as to meet the requirements of the Companies Act, Income Tax Act, and other statutes. Financial accounting emphasizes the measurement of profitability, while cost accounting aims at ascertainment of costs and accumulates data for this very purpose. Financial accounting provides operating results and financial position usually gives information through cost reports to the management as and when desired. In financial accounts, stocks are valued at cost or market price whichever is less, whereas stocks are valued at cost price in cost accounts.

Importance of Cost Accounting

Costing as an aid to management: Cost accounting helps in periods of trade depression and trade competition. Cost accounting helps in making estimates. Cost accounting eliminates wastages. Cost accounting helps in inventory control. It aids creditors, national economy, and employees.

“Management accounting is concerned with accounting information that is useful to management. In simple words as 'accounting for effective management.' Management accounting is a wide and broad-based subject, which includes a variety of aspects of business operation.

Scope

Financial Accounting, Cost accounting, Budgeting and Forecasting, statistical methods, interpretation of Data, internal auditing, Tax planning