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Cost Accounting | Purpose or Functions of Cost Accounting

Purposes or Functions of Cost Accounting

    Purposes or Functions of Cost AccountingPurposes or Functions of Cost Accounting

(a)Purposes or Functions of Cost Accounting – Cost accounting is the classifying recording and appropriate allocation of expenditure. For the determination of the costs of products of services and for the presentation of suitably arranged data for the purpose of control and guidance of management. It includes the ascertainment of the cost of every order, job contract, process, service or unit as may be appropriate. It deals with the cost of production, selling and distribution.

It is thus the provision of such analyses and classification of expenditure as will enable the total cost of any particular unit of production or service to be ascertained with reasonable degree of accuracy and at the same time to disclose exactly how such total cost is constituted (material, labor and other expenses) so as to control and reduce its costs.

Cost accounting has been defined by some prominent scholars as follows:

1. According to R.N.Carter, Cost Accounting is defined as a system of recording in accounts the material used and labor employed in the manufacture of certain commodity or on a particular job.

2. According to R.R.Gupta, Cost Accounts are a system of accounting where-by expenditure is analyzed to find the total cost of cache particular unit of production with a reasonable degree of accuracy and to show how much cost is made up.

3. According to Walter W.Bigg. Cost Accounting is the provision of such analysis and classification of expenditure as will enable 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.

4. According to L.R. Dicksee, Cost Accounts are accounts supplementary or subsidiary to Financial Accounts and are complied for the purpose of giving additional information as to the detailed cost of working of an undertaking or any particular section thereof.

5. (a) According to ICWA (London), Cost Accounting is the process of accounting for cost from the point at which expenditure is incurred or committed to the establishment of its ultimate relationship with cost centers and units. In its widest usage it embraces the preparation of statistical data, the application of cost control methods and the ascertainment of the profitability of activities carried on or planned.

(b) Costing is the technique and process of ascertaining costs.

6. According to Kohler, Cost Accounting is that branch of accounting dealing with the classification recording, allocation summarization and reporting of current and prospective costs.

7. According to Wheldon, Cost Accounting deals with classifying recording and appropriate allocation of expenditure for the determination of the costs of products or services, the relation of these costs to sales values. and the ascertainment of profitability.

Features of Cost Accounting are as follows:

(i) It is a process of accounting for costs.

(ii) It is concerned with cost ascertainment and cost control.

(iii) It records income and expenditure relating to production of and services.

(iv) It establishes budgets and standards so that actual costs may be compared to find out deviations or variances.

(v) It provides statistical data on the basis of which future estimates are prepared and quotations are submitted.

(vi) It involves the preparation of right information to the right person at the right time so that it may be helpful to the management for planning control and decision-making.

(vii) Cost Accounting is the special part of Financial accounting.

(viii) Total cost or cost per unit of goods manufactured can be ascertained by cost accounting.

(ix) Under this adequate control is imposed on elements of cost ( material, labor and expenses).

(x) Under this cost of incomplete work (jobs) is also ascertained.

Purposes or Functions of Cost Accounting

Purposes of Functions of Cost Accounting – Cost accounting provides a technique for control of manufacturing and business operations. Costing serves number of purposes among which the following are considered to be most important.

1. Ascertainment of Cost-Ascertainment of cost was considered to be the primary objective of cost accounting in the initial stages of its development. However, in modern times this has assumed to be the secondary objective of cost accounting. Cost ascertainment in valves the collection and classification of expenses at the first instance.

The cost of each product, process. job or operation is ascertained. For this purpose various techniques such as historical costing, marginal costing, may be employed.

2. Cost Control- In past, cost was considered as secondary objective of cost accounts. But in modern times, it is considered as primary objective of cost accounts because of its utmost importance in all business undertaking. Cost control is exercised through the techniques of budgetary control and standard costing.

In these techniques, cost is controlled by comparing actual cost with pre-determined cost. Cost control is becoming increasing important because of growing competition. These techniques enable the management in knowing the operation efficiency of a business.

3. Determination of Selling Price- Every business organization aims maximizing profit. Cost accounting provides cost information on the basis of which selling prices of products or services may be fixed. Prices are generally fixed above cost but in certain special circumstances prices of products may have to be fixed even below total cost.

This type of division can be taken only when cost is classified into fixed and variable cost. In periods of depression also, cost accounting guides in deciding the extent to which the selling prices may be reduced to meet the situation.

4. Guide to Business Policy- Cost accounting aims at serving the needs of management in conduction the business with utmost efficiency. Cost data provide guidelines for various managerial decision like the following-

(i) Introduction of a new product.

(ii) Making or buying component parts from outside suppliers.

(iii) Selling below cost.

(iv) utilization of unused plant capacity.

(v) Replacement of existing machines by automatic machine.

(vi) Whether to close or continue operations in spite of losses.

5. Frequent Preparation of Accounts and Other Reports- The management of every business constantly rely upon the reports on cost data n order to know the level of efficiency relating to purchase, production, sales nd operating results, Financial accounts provide information only at the end of the financial year because closing stock value is available only at the end of he year. But cost accounts provide the value of closing stock at frequent intervals by adopting a Continuous Stock Verification system. Using the value of closing stock it is possible to prepare final accounts and know the operating results of the business.

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