Written by Cost Accounting is a form of managerial accounting that is concerned with determining the costs of doing something, manufacturing products, rendering services or conducting any activity or function.
It is the process of collecting, recording, classifying, coding, analyzing, and processing cost information that will help managers plan, control and make decision in the organization.
Cost accounting may also be defined as applying principles, methods and techniques in determining the total cost of production by assessing the fixed cost and variable cost of a product, department or organisation.
It may also be defined as the accumulation, classification, summarizing, and interpretation of cost information for the purpose of operational planning. controlling and making cost decisions.
Cost accounting provides managers with detailed information that management needs to control costs of operations and plan for the future.
Note that the objective of cost accounting is to provide useful information that is essential for management planning, decision making and control.
Benefits Of Cost Accounting
1. Discloses profitable and unprofitable activities: By calculating the costs of production, selling price, and profitability of a product, cost accounting helps identify which activities are profitable and which activities are unprofitable.
2. Assists in identifying efficiency: Cost accounting provides valuable insights into the efficiency of different segments or departments within an organization.
It breaks down the cost of each activity and helps the organization identify areas where an organization is inefficient and where improvements can be made.
3. Aids in the planning of future policies: On the basis of data provided by cost accounting, an organization can plan for the future.
Cost accounting provides data on the cost of various products, processes, and activities, which can be used to determine the best course of action for the future.
4. Determines the exact cause of an increase or decrease in profit: While financial accounting usually provide information on the actual profit or loss, it fails to tell us the causes of the increase or decrease in the profit in that particular period.
However, with the help of cost accounting, we can easily identify the causes of increases or decreases in profit, which is most cases, is a increase or decrease in costs of production.
5. Helps in preventing wastage: Since cost accounting is concerned with providing a detailed breakdown of costs, it is possible to check various forms of wastage or losses and take measures to reduce wastage.
6. Cost accounting makes comparison possible: The information provided by cost accounting allows organizations to compare different products, processes, and activities.
Proper maintenance of costing records provides various costing data for comparison which helps management in planning for the future.
7. It guides pricing: Cost accounting provides relevant cost data that an organization can use to understand the cost structure of its products and services.
This information will help the organization make informed decisions about what price to charge.
Since we have seen the importance of cost accounting information and what it actually adds to the organisation, let’s move over to the disadvantages of cost accounting.
Disadvantages of Cost Accounting
1. It is expensive to maintain: Cost accounting requires a lot of clerical paperwork to maintain various costing records. As a result, it is very expensive to maintain.
So, for small-scale and medium-scale businesses that may not have the required resources, it becomes a difficult task to maintain the cost accounting data.
2. Complex system: Another disadvantage of cost accounting is that it can be a complex system to use.
The system to account for cost is a complex process.
If one does not possess a thorough understanding of cost accounting, he cannot easily perform cost accounting.
Even for accounting professionals, it sometimes becomes difficult to estimate and account for costs.
3. Cost is not constant: costs are not constant and can change from year to year
The cost of raw materials, labor and other materials change almost every year due to various factors such as government policies and the economy.
As a result of this, managers faced uncertainty in making decisions because they have to rely on cost estimates and assumptions, which may not always be accurate.
Various Costs Used in Cost Accounting
1. Fixed costs: These are costs that do not change within a relevant range.
A fixed cost remained fixed even with as production level increase so long it is within a given range.
Once the given range is exceeded, fixed costs step up or increase.
2. Variable costs: These are cost that changes in direct proportion to the level of activity.
A variable change changes with change in production level.
Direct expenses, direct material, and direct labour costs are all examples of variable costs.
3. Direct costs: Direct costs are costs components that can be traced directly to a product, goods or services.
A direct cost is any cost incurred in relation to a particular product and service
Direct cost includes direct labor and direct materials.
4. Indirect costs: These are also called overhead costs.
They are cost incurred in the cost of making a product, which cannot be traced directly and in full to the product.
Examples of indirect costs are indirect labor and indirect materials.
5. Opportunity costs: In cost accounting, opportunity refers to the cost of the second alternative that must be given up in order to implement a project or action.
6. Sunk costs: Sunk costs is a cost that has already been incurred and cannot be recovered, regardless of the future outcome of a decision.
Since sunk costs cannot be recovered regardless of the decision to be taken, they are also called irrelevant costs.
