Importance of Cost Accounting

Bookmark added to your notes.
View Notes

What is Cost Accounting?

Cost accounting is the version of Managerial Accounting, this aims to capture the company's total cost of production. The same is done by assessing the variable costs at each step of production as well as the fixed costs as assessed such as the expense.

The main points in this regard is that - 

  • Cost accounting is used internally by the management in order to make a fully assured business decision.

  • Unlike the financial accounting, which provides information to the external financial statement users, cost accounting is not required to conform to any set standards which can be flexible to meet the needs of the management.

  • Cost accounting considers all kinds of input costs that are associated with production, including both the variable and fixed costs.

  • Types of cost accounting includes the standard costing, activity-based costing, and marginal costing.

Types of Cost Accounting

There are various types of Cost Accounting:

Standard Costing

Standard costing assigns ‘standards’ to the costs. The standard costs are grounded to the labour and materials to produce the goods and services under standard operating conditions. 

Activity-Based Costing

Activity-Based Costing identifies the overhead costs from each department and then assigns specific cost objects like goods or services. The ABC system of cost accounting is based on these activities.

Marginal Costing

Marginal costing also known as the cost volume profit analysis is the impact where the cost of a product is added to one additional unit into the production unit. This type of costing is useful for short-term economic decisions. 

All these types of costings help the management in identifying the impact of cost in the business unit. This type of analysis is used by the management to gain analysis into them potentially to produce profitable products.

Importance of Cost Accounting

The importance of cost accounting is very much useful to the management of an organization, the importance of Cost Accounting is discussed in the following section vividly:

  • Classification of Costs

Cost is a generic term which needs to be classified for further use. The Cost Accounting involves the recording and classification of all such costs. Costs involve the prime cost, direct cost, factory cost, selling cost and more other costs. Classification allows the management of the costs and to ascertain the profitability of any such processes and further activities. This also helps in calculating the efficiency.

  • Cost Control

This is efficient for the business to focus on controlling the cost of the inventory, labour, and various other kind overhead costs. For example, to achieve the maximum efficiency in their inventory management they can adopt the EOQ technique which is the costing technique. Similarly, by analysing the costs of labour and the capacity of machinery their efficiency can be improved also. Cost accounting classifies the overheads into fixed and variable.

  • Price Determination

Cost accounting makes the basic distinction between the fixed and variable costs. This is then used by the company or the business unit to fix the prices of the products, according to their costs of the product. The management here finds the most ideal price for the product or the service, which is not too high and not too low. For example, where the economy suffers a depression period.

The businessman lowers the prices of his products to survive the depression circumstances in the economy. He can start this by trying to control the variable costs and to allow him to fix the product’s prices.

  • Fixing of the Standards

The organizations use the standards to make the estimates and the budgets for their future. They use this as the basis to measure the actual efficiency of the process or about the department.

This is an entire branch of cost accounting which is known as the Standard Costing dedicated priorly to this process.

FAQ (Frequently Asked Questions)

1. What is Managerial Accounting?

Ans. Managerial accounting is– identifying the information, measuring its effect, analysing the future outcome, and interpreting the results of the outcome, and then communicating the financial information to the managers for the pursuit of an organization's goals. Managerial Accounting is quite different from financial accounting. The purpose of managerial accounting is to guide the internal users of the company in making a well-informed business decision.

2. What is the Cost of Production?

Ans. Production or the product costs refer to those costs which is incurred by a business from manufacturing a product or by providing a service. Production costs includes a wide variety of expenses, like labour, raw materials, consumable supplies, and other general overhead.

3. What is Prime Cost?

Ans. Prime costs are the firm's expenses which is directly related to the materials and labour that are used in production. This refers to a manufactured product's costs, that is calculated to ensure better profit margin for a company.

4. What is the Full Form of EOQ?

Ans. EOQ is the abbreviated form for Economic Order Quantity. The economic order quantity is the optimum quantity of an item which is required to be purchased at one time in order to minimize the combined annual costs of ordering and carrying the item in an inventory.