Meaning and origin of cost accounting

Cost accounting has long been used to help managers to understand the costs of running a business. Modern cost accounting originated during the industrial revolution, when the complexities of running a large scale business led to the development of systems for recording and tracking costs to help business owners and managers make decisions. Cost accounting is a method of accounting in which all costs incurred in carrying out an activity or accomplishing a purpose are collected, classified, and recorded. This data is then summarized and analyzed to arrive at a selling price. Cost accounting is the process of determining and accumulating the cost of product or activity. It is a process of accounting for the incurrence and the control of cost. It also covers classification, analysis, and interpretation of cost. In other words, it is a system of accounting, which provides the information about the ascertainment and control of costs of products.

Objectives of Cost Accounting

The following are the important objectives of cost accounting: 1) Ascertainment of cost: The primary objective of the cost accounting is to ascertain cost of each product, process, job, operation or service rendered. 2) Ascertainment of profitability: Cost accounting determines the profitability of each product, process, job, operation or service rendered. 3) Classification of cost: Cost accounting classifies cost in to different elements such as materials, labour and expenses. It has further been divided as direct cost and indirect cost for cost control and recording. 4) Control of cost: Cost accounting aims at controlling cost by setting standards and compared with the actual, the deviation or variation between two is identified and necessary steps are taken to control them.

5) Fixation or selling prices: Cost accounting guides management in regard to fixation of selling prices of the products. It is also helpful for preparing tender and quotations.

Differences between cost accounting and financial accounting

There are several differences between cost accounting and financial accounting, which are: 1) Users: Financial accounting involves the preparation of a standard set of reports for outside users, which may include investors, creditors, credit rating agencies, and regulatory agencies. Cost accounting involves the preparation of a broad range of reports that management needs to run a business. 2) Format: The reports prepared under financial accounting are highly specific in their format and content, as mandated by either generally accepted accounting principles or international financial reporting standards. Cost accounting involves creating reports that can be in any format specified by management, with the intention of including only that information pertinent to a specific decision or situation. 3) Level of detail: Financial accounting primarily focuses on reporting the results and financial position of an entire business entity. Cost accounting usually results in reports at a much higher level of detail within the company, such as for individual products, product lines, geographical areas, customers, or subsidiaries. 4) Product costs: Cost accounting compiles the cost of raw materials, work-in-process, and finished goods inventory, while financial accounting incorporates this in formation into its financial reports (primarily into the balance sheet). 5) Regulatory framework: The structure of financial accounting reports are tightly governed by either generally accepted accounting principles or international financial reporting standards. There is no regulatory framework governing cost accounting reports.

6) Report timing: Financial accounting personnel issue reports only at the end of a reporting period. Cost accounting staff may issue reports at any time and with any degree of frequency, depending upon management's need for the information. 7) Time horizon: Financial accounting is only concerned with reporting the results of reporting periods that have already been completed. Cost accounting does this too, but also can be involved in a variety of projections for future periods.

Scope of Cost Accounting

The terms costing and cost accounting are many times used interchangeably. However, the scope of cost accounting is broader than that of costing. Following functional activities are included in the scope of cost accounting: 1) Cost book-keeping: It involves maintaining complete record of all costs incurred from their incurrence to their charge to departments, products and services. Such recording is preferably done on the basis of double entry system. 2) Cost system: Systems and procedures are devised for proper accounting for costs. 3) Cost ascertainment: Ascertaining cost of products, processes, jobs, services, etc., is the important function of cost accounting. Cost ascertainment becomes the basis of managerial decision making such as pricing, planning and control. 4) Cost Analysis: It involves the process of finding out the causal factors of actual costs varying from the budgeted costs and fixation of responsibility for cost increases. 5) Cost comparisons: Cost accounting also includes comparisons between cost from alternative courses of action such as use of technology for production, cost of making different products and activities, and cost of same product/ service over a period of time. 6) Cost Control: Cost accounting is the utilisation of cost information for exercising control. It involves a detailed examination of each cost in the light of benefit derived from the incurrence of the cost. Thus, we can state that cost is analysed to know whether the current level of costs is satisfactory in the light of standards set in advance. 7) Cost Reports: Presentation of cost is the ultimate function of cost accounting. These reports are primarily for use by the management at different levels. Cost Reports form the basis for planning and control, performance appraisal and managerial decision making.