Cost Accounting At A Glance.
Cost Accounting is a branch of accounting which consists of the activities of cost ascertainments, cost analysis, cost recording and cost reporting mainly in the operations of the factory. Cost Accounting was developed to overcome the limitations of financial accounting.
Financial accounting consists of providing company wide information like profitability and financial position primarily to owners and outsider. it does not throw much light on the operational efficiency of the individual department or division or cost centre. It is also failed to help in classification and allocation of expenses in separate cost centres and hence prices of different production unit, services could not be determine. Hence a system was developed whereby standards could be fixed, budgets could be made so as to facilitate the proper control over the cost at each steps and element of cost.
In contrast to financial accounting, cost accounting provides information to management for proper planning, operation control and decision-making in an objective manner. It breaks up the total cost on a unit basis of which future production policies are set. It helps in comparison of costs in different periods, different volumes of output and different departments. it analyses the cost and causes of any variations from the standards set.
Inspire of its importance and uses, cost accounting has its own limitations. It lacks uniform procedure and carries number of assumptions, conventions and flexible factors like which method to follow for valuing stock, basis on which cost is to be allocated etc. Evolution of cost accounting system in a concern involves number of formalities and a proper balance has to be struck between the size, nature of the business and the cost of installing a cost accounting system.
Cause effect relationship charging cost after its incurrence, ignoring the convention of prudence, past costs not to be included in future costs, exclusion of abnormal cost and following double entry for recording are the general principles of cost accounting.
An ideal costing system should commensurate with the size and the nature of the business. It should be flexible enough to accommodate with the necessary changes to be made and entail minimum changes in the existing set up and should not increase the work load immensely. It should be economical, simple to understand as well as to install and should facilitate timely comparison so that right decision can be made at the right time. it should ensure that proper material control is being exercised and wage system is adequate and the basis of collection and allocation of expenses in uniform. Cost Accounting system and Financial Accounting system should work hand in hand and should be easy to reconcile.
To install a costing system, objectives to be achieved should be determined so as to decide upon its structure and its functions. If it is merely for cost ascertainment, it need not be elaborate but if its function is also to provide information to management for planning, decision-making and control, it has to be designed systematically and gradually introduced so as not to disturb the existing set up. A separate new department has to be introduced, with cost accountant being assigned duties and responsibilities. Clear relationships and line of command and directions are to be set up. Installing an ideal costing system is generally not an easy task as adequate top management support may be not available and the existing staff is not cooperative and hesitant to work a new system. Staff has to be trained and such difficulties can be overcome by gaining top level managements confidence and explaining to the existing staff the need and its impact on the operations of the concern.