Cost Accounting Principles: Definitions and Objectives

Understanding Costing and Cost Accounting

Costing refers to the technique and process of ascertaining costs. The technique consists of the principles and rules for determining the cost of products and services. The process of costing is the day-to-day routine of ascertaining costs. Cost accounting, on the other hand, is defined as the process of accounting for cost from the point at which expenditure is incurred or committed.

Objectives of Cost Accounting

• Ascertainment of cost: This is the primary objective of cost accounting. Different techniques and systems of costing are used under various circumstances.
• Control of cost: Cost control aims at improving efficiency by monitoring and reducing expenses. This objective is becoming increasingly important due to growing market competition.
• Support for business policy: Cost accounting serves the needs of management in conducting business with maximum efficiency. Cost data provide essential guidelines for various managerial decisions.
• Determination of selling price: Cost accounting provides the information necessary to fix the selling prices of products or services. During periods of economic depression, it helps determine the extent to which prices may be reduced to meet specific situations.
• Matching cost with revenue: Determining the profitability of each product, process, or department is a vital objective of costing.
• Special cost studies and investigations: It facilitates special cost studies and investigations, which serve as the basis for management decision-making policies.

Elements of Cost

Direct Costs

• Direct material cost: Examples include cloth in garments, leather in shoemaking, and spare parts in electronics.
• Direct wages: Labor engaged in actual production, such as inspectors and analysts.
• Direct expenses: Costs such as traveling expenses, excise duty, royalties, and repair and maintenance.

Indirect Costs

• Indirect materials: Items such as lubricants, cotton waste, oil, and stationery.
• Indirect labor: Salaries and wages paid to foremen, supervisors, and storekeepers.
• Indirect expenses: Costs such as rent, rates, insurance, depreciation, and welfare or medical expenses.