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Meaning of Cost Accounting | Nature and Scope of Cost Accounting

Meaning of Cost Accounting | Nature and Scope of Cost Accounting
Meaning of Cost Accounting | Nature and Scope of Cost Accounting

Meaning of Cost Accounting

Meaning of Cost Accounting-Cost Accountancy means and includes the principles, conventions, techniques and systems which are employed in a business to plan and control the utilization of its resources. It is defined by CIMA (London) as the application of costing and cost accounting principles, methods and techniques to the science, art and practice of cost control and the ascertainment of profitability. It includes the presentation of information derived therefrom for the purposes of managerial decision-making.

Thus, cost accountancy is the science, art and practice of a cost accountant. It is a science in the sense that it is a body of systematic knowledge which a cost accountant should possess for the proper discharge of his duties and responsibilities. It is an art, as it requires the ability and skill on the part of a cost accountant in applying the principles of cost accountancy to various managerial problems like price fixation, cost control etc.

Practice refers to constant efforts on the part of cost accountant in the field of cost accountancy. The theoretical knowledge alone would not enable a cost accountant to deal with the intricacies. He should thus, have sufficient practical training. Cost Accountancy includes costing, cost accounting, cost control and cost audit.

Nature of Cost Accounting

The nature of cost accounting can be discussed under the following headings:

1. Cost Accounting is a Branch of Knowledge-Though cost accounting is considered as a branch of financial accounting, it is one of the important branch of knowledge. It is an organized body of knowledge consisting of its own principles, concepts and conventions, These principles and rules vary from industry to industry.

2. Cost Accounting is a Science- Cost accounting is considered as a science because it is a body of systematic knowledge relating to not only cost accounting but relating to a wide variety of subjects such as law, office practice and procedure, data processing, production and material control, etc. It is necessary for a cost accountant to have intimate knowledge of all these field of study in order to carry on day-to-day activities. But it is to be admitted that it is not a perfect science as in the case of natural science.

3. Cost Accounting is an Art-Cost accounting is an art in the sense it requires the ability and skill on part of cost accountant in applying the principles methods and techniques of cost accountancy to various management problems. These problems include the ascertainment of cost control of costs, ascertainment of profitability etc.

4. Cost accounting is a Profession-In recent years cost accounting has become one of the important professions which has become more challenging. This view is evident from two facts. First, the setting up of various professional bodies such as National Association to Accountants (NAA), the Institute of Cost and Management Accountant U.K. the Institute of Cost and Works Accounts in India and such other professional bodies both in developed and developing countries have increased the growing awareness of costing profession among the people. Secondly, a large number of students have enrolled these institutes to obtain costing degrees and membership for earning their livelihood.

The following topics come under the purview of cost accountancy

(1) Costing

(2) Cost Accounting

(3) Cost Control

(4) Budgeting

(5) Cost Audit

What is Costing

Costing is simply determining costs by using any method like arithmetic process, memorandum statements etc. In simple words, costing means finding out the cost of product or service by any technique or method The terminology of ICMA, London defines costing as the technique and process of ascertaining the cost.

The above definition is very significant in as much as it carries main theme of cost accountancy. This definition emphasizes two important aspects.

(a) The technique and process of costing-The technique of costing involves two distinct steps.

(i) Collection and classification of costs according to various elements.

(ii) allocation and apportionment of the expenses which can not be directly charged to production. As a process costing is concerned with the routine ascertainment of cost with the formal procedure.

(b) Cost ascertainment-It involves three steps.

(i) collection and analysis of expenses,

(ii) measurement of production at different stages

(iii) making up of production with the expenses. To achieve the first step. costing has developed different systems such as Historical, Estimated and Standard cost. For achieving the second step, costing has developed different methods such as single or output costing, job costing, contract costing, etc. Finally, for achieving the last step. costing has developed important techniques such as absorption costing, marginal costing and standard costing.

What is Cost Accounting

It is the process of accounting for cost which begins with recording of expenditure and ends with the preparation of statistical data. It is formal mechanism by means of which cost of product or services are ascertained and controlled. Cost can be ascertained either by following the historical or pre-determined system of costing.

Cost can be pre-determined either by standard costing or by estimated costing. If the cost and financial accounts are kept separately then their reconciliation is also to be done in order to verify the accuracy of both sets of accounts.

What is Cost Control

Cost control is the guidance and regulation by executive action of the costs of operating an undertaking. It aims at guiding the actual towards the line of targets; regulates the actual so they deviate from the targets. This guidance and regulation is done by an executive action.

The cost can be controlled by standard costing budgetary control, proper presentation and reporting of cost data and cost audit. Cost control is exercised through a variety of techniques such as inventory control, quality control, budgetary control, standard costing.

The main advantages of cost control are as follows:

(i) It helps in utilizing the resources to the full extent.

(ii) It increases the goodwill of the business concern.

(iii) It increases the profitability of the business.

(iv) It helps in competing successfully in the market.

(v) It provides goods to the consumers at lower process.

What is Budgeting

A budget is a quantitative expression of a plan of action prepared in advance of the period to which relates. It may be prepared for the entire organization for various departments or for various functions involved in the organization. Budget is a means of translating the overall objectives of the business into detailed feasible plan of action. George R. Terry defines budgets as an estimate of future needs arranged according to an orderly basis, covering, some or all the activities of an enterprise for a definite period of time.

What is Cost Audit

The origin of the concept of Cost Audit could be traced to the second world war period when the practice of cost plus contract began. In India, cost audit is statutorily prescribed as it assists management in decision-making process by providing adequate cost data.

Cost audit helps management in money respects such as in price fixing avoiding wastages, reorganisation of purchases and sales, in exercising internal control, etc. The term cost audit is defined by ICMA London as the verification of cost accounts and a check on the adherence to cost accounting plan.

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