Cost accounting is associated with accounting of the cost. It comprises of Cost and Accounting. The term cost signifies the total of all expenditures involved in the process of production. Thus, it includes the costs involved in the production and the cost involved while receiving it. Accounting is a process to collect and maintain financial records of each income and expenditure and make avail of such information to the concerned officials. Therefore, cost accounting is a practice and process of cost which regulates the productivity of a business concern by controlling the cost with the application of accounting norm, process and rules.
Cost accounting embraces the presentation of the information derived there for managerial decision making. It has been described in management literature that cost accounting is an arts as well as science. According to the Terminology of Management and Financial Accountancy Published by the Chartered Institute of Management Accountants, London, cost accountancy entails, "the application of costing and cost accounting principles, methods and techniques to the science, art and practice of cost control. It includes the presentation of information derived there for the purpose of managerial decision making. It is science because it is a form of systematic knowledge having certain principles. It is an art as it requires the aptitude with which a cost accountant applies the principles of cost accounting in several managerial problems.
Scope of Cost Accounting: Cost accounting deals with business expenditures, or sums that company spends to operate its infrastructure and provide customers with products and services. The procedure of cost accounting tracks variable costs, or expenditures such as materials and payroll that go directly into the products and services offers. Cost accountants also register fixed costs, or other expenses such as rent and utilities that do not change much irrespective of sales volume. It has been revealed in management reports that cost accounting has limited scope. It is concerned with cost accumulation for stock valuation to meet the requirement of external reporting (Nigam, and Jain, 2001).
Theoretical studies described Cost accounting as the provision of such analysis and classification of expenditure as well as the total cost of any particular unit of production to be ascertained with reasonable degree of accuracy and at the same time to disclose exactly how such total cost is constituted (W.W.Bigg). Another accounting professional, R.N. Carter stated that "Cost accounting is a system of recording in accounts the materials used and labour employed in the manufacture of a certain commodity or on a particular job."
It has been established that cost accounting is a major part of accounting system which records systematically the cost involved in raw materials and labour used in the process of production and at the same time determines the total cost and unit cost of product. The process of recording, categorizing and analysing of cost is the cost accounting.
Objectives of Cost accounting: The objective of cost accounting is to document and recognise the ways business spends its cash. This process is significant for tax purposes, so the returns company file accurately reflect company's expenses. Cost accounting information is also valuable for internal company operations, giving the tools to analyse trends and make strategic decisions. Calculating unit costs, or the amount company spend to create each unit it sell, provides with a benchmark for evaluating overall profitability and break-even points. Major objectives are:
There are three broad components of cost:
Material: It is the substance from which the product is made. It may be in a raw or a manufactured state. It can be direct as well as indirect. Direct Material becomes an integral part of the finished product and which can be suitably assigned to specific physical units such as all material or components specifically purchased produced or requisitioned from stores, primary packing material that include cartoon, wrapping, cardboard, boxes, purchased or partly produced components. Direct material is also called as raw-material, process material, prime material, production material, stores material, constructional material. Indirect Material is used for purposes auxiliary to the business and which cannot be conveniently assigned to specific physical units. Some examples of indirect material are consumable stores, oil and waste, printing and stationery. Indirect material may be used in the factory, the office or the selling and distribution division.
Labour: Second component of cost is labour. Human labour is required to produce finished product. These human efforts are called labour. Labour can be direct as well as indirect.
Direct labour is one which takes an active and direct part to produce particular commodity. Direct labour costs are specially and conveniently noticeable to specific products. Direct labour is also called as process labour, productive labour, operating labour, manufacturing labour, and direct wages. Indirect labour is one which is employed for the purpose of carrying out tasks incidental to goods or services provided. It cannot be practically traced to specific units of output wages of store such as keepers, foreman, time keepers, directors, fees, salaries of salesmen.
Expenses: Expenses are vital component of cost. It may be direct or indirect. Direct expenses are those which can be directly, conveniently and wholly allocated to specific cost centres or cost units. Such as hire of some special machinery required for a particular contract, cost of defective work incurred in connection with a particular job or contract. Indirect expenses are those which cannot be directly, conveniently and wholly allocated to cost centres or cost units.Elements of cost accounting (Source: Alex, 2012 )
Advantages of Cost accounting: Cost accounting has several benefits that are mentioned below:
Cost accounting also helps in determining selling price. It controls material and supplies. Management get more benefit with the initiating of cost accounting. It helps to ascertain the cost and selling price of the product. Cost data help management to develop the business policies.
Cost accounting is also beneficial for investors. Investors want to know the financial conditions and earning capacity of the business. An investor must collect information about organization before making investment decision and investor can gather such information from cost accounting.
Cost accounting is also beneficial for consumers. The decisive aim of costing is to reduce the cost of production to minimize the profit of business. Reduction in the cost is usually passed on to the consumers in the form of lowering price. Consumers get quality goods at affordable rate.
Cost accounting also extend its benefit to Employees. Cost accounting assists to fix the wages of the workforces. Competent workers are rewarded for their efficiency. It helps to induce incentive wage plan in business.
Cost accounting is one of the major sources to deliver reliable data to internal as well as external parties. It assists government agencies to regulate excise duty and income tax. Government formulates tax policy, industrial policy, export and import policy based on the information provided by the cost accounting.
To summarize, the cost accounting is aimed to identify the efficiencies and inadequacies, if any, in the use of material, labour and machinery. Cost accounting make use of standard cost against which actual costs are compared, variances are calculated and analysed into their causes so that corrective actions may be taken. Cost accounting is an information presented in more flexible way. The main focus of cost accounts to control and reduce cost. Cost accounting does not use financial accounting principles. Since cost accounting analyses each possible units therefore it is useful to management as well as the personnel.