Importance of Cost Accounting

What is Cost Accounting?

Cost accounting is broad and extends beyond calculating production costs for inventory valuation, which government-reporting requirements largely dictate. However, accountants do not allow external reporting requirements to determine how they measure and control internal organization’s activities. In fact, the focus of cost accounting is shifting from inventory valuation for financial reporting to costing for decision-making.

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The main objective of cost accounting is communicating financial information to management for planning, evaluating and controlling performance, and to assist management to make decisions that are more informed. Its data are used by managers to guide their decisions.

From the definitions above, we can generally say that cost accounting is concerned with:

1. Resource allocation decisions, for instance, production, pricing and product costing
2. Performance measurement and evaluation of managerial performance; this is done through variance analysis, comparing actual output with the standard or budgeted output.
3. Cost planning and cost control of activities of operations since it aims at improving
4. efficiency by controlling and reducing costs
5. Formulation of overall strategies and long-range plans; Cost accounting will be useful in forecasting

Cost accounting aims at providing useful information to decision makers to enable them make better decisions. It helps them in preparing various statements such as cash budgets and performance reports, cost data collection and application of costs to products and services.

Importance of Cost Accounting In Management

Cost accounting is utilized for a number of purposes, some of which are briefly described in the following points:

Importance of cost accounting for record keeping

This may be seen as a record keeping or score-keeping role. Information must be gathered and analyzed in a manner which will help in planning, controlling and decision making

Importance of cost accounting for Planning and budgeting

This involves the quantification of plans for future operations of the enterprise; such plans may be for the long or short term, for the enterprise as a whole or for the individual aspects of the enterprise.

Importance of cost accounting for Control of operations of the enterprise

Control may be assisted by the comparison of actual cost information with that included in the plan. Any differences between planned and actual events can be investigated and corrective action implemented as appropriate

Importance of cost accounting for Decision making

Cost accounting information assists in the making of decisions about future operations of the enterprise; such decisions making may be assisted by the information from cost techniques and cost-volume-profit analysis.

Importance of cost accounting for Resource allocation decisions

For example product pricing in determining whether to accept or reject jobs. This is

based on cost and revenue implications of the relevant decisions

Importance of cost accounting for Performance evaluation

Cost accounting information is used to measure and evaluate actual performance so as

to make a decision of the degree of optimality or efficiency of resource utilization.

Scope of Cost Accounting

As part of their jobs, cost accountants interpret results, report them to management and provide

analyses that assist decision-making in the following departments:

Cost Accounting in Manufacturing

Cost accountants work closely with production personnel to measure and report manufacturing costs. The efficiency of the production departments in scheduling and transforming materials into finished units is evaluated for improvements.

Cost Accounting in Engineering

Cost accountants and engineers translate specifications for new products into estimated costs; by comparing estimated costs with projected sales prices, they help management decide whether manufacturing a product will be profitable.

Cost Accounting in Personnel

Personnel department administers the wage rate and pay methods used in calculating each employees pay. This department maintains adequate labour records for legal and cost analysis purposes.

Cost Accounting in Marketing

Marketing involves the cost accountant during the product innovation stage, the manufacturing planning stage and the sales process. The marketing department develops sales forecast to facilitate preparing a products manufacturing schedule.

Cost Accounting in Treasury

The treasurer uses budgets and related accounting reports developed by cost accountants to forecast cash and working capital requirements. Detailed cash reports indicate where there are excess funds to invest or where cash deficits exist and need to be financed.

Cost Accounting in Financial accounting

Cost accountants work closely with financial accountants who use cost information in valuing inventory for external reporting and income determination purposes.

Cost Accounting in Systems design

Cost accountants are becoming more involved in designing computer integrated manufacturing (CIM) systems and databases corresponding to cost accounting needs. The idea is for cost accountants, engineers and system designers to develop a flexible production process responding swiftly to market needs

Cost estimates, competition, supply, demand, environmental influences and the state of technology determines the sales price that the product will be offered and will command in the market.

At this point, it cannot be over-emphasized that cost accounting is simply an information system designed to produce information to assist the management of an organization in planning and controlling the organization’s activities. It also assists the management to make informed decisions so as to enable the organization to operate at maximum effectiveness and efficiency.

Role of Cost Accounting Department

The cost accounting department is responsible for keeping cost accounting records. This includes gathering, compiling and communicating a variety of information regarding an organization’s cost activities. For the records kept to be of proper use for the managerial functions, they should

1. Analyze production, administration, selling and distribution costs in such a way as to
2. Help management reach decisions required.
3. Be used to produce periodic performance statements or control reports which are
4. Necessary to the management for control purposes.
5. The cost accounting system should be capable of analyzing
6. Past costs for profit measurement and stock valuation purposes
7. Future costs of planning and decision making

Information obtained may be non-mutually exclusive in nature. This means that information gathered as part of the management information system may be used in two or more subsystems for differing purposes. An example of this information is with regard to the amount and location of work in progress: (work in progress refers to partly completed units of products where a product passes through a number of operations and processes before being passed into finished goods store or to the customer). Work in progress information may be used by:

a) Production planning department; in order to monitor the progress of parts of an order through the production process and to instigate action to speed up the completion of slow moving parts of an order.

 b)  Quality control department; in comparing one batch of product with another in

highlighting the incidences of process losses and their location.

c)  Cost management department; in the quantification and valuation of actual losses as compared to the level originally allowed for in the business plan.

d)  Financial accounting department; in the valuation of work in progress for balance sheet purposes and for purposes of determining the cost of sales in the income statement.