Fundamentals of Cost Accounting

Costing – An Aid to Management

The management of any organization is responsible for the running of the business. It has three main functions, namely planning, decision-making and controlling. So the management and the managers use various tools and processes to help them in their functions. One such process is costing. Let us explore the concept of, Costing – An Aid to Management.

Functions of Management

1] Planning

Planning comprises of the management setting objectives, goals, and missions for the far and the near future of the organization.

Then the management plans the course of action and the activities to achieve these goals. There should also be alternatives and back-up plans. So planning is essentially concerned with future events, budgets etc.

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2] Decision-Making

This is one of the most important functions of management. Every aspect of running a business involves decision-making.

For example, the fixing of prices, the increase or decrease of prices in different economic scenarios, the capacity at which the plant should operate, an introduction of a new product, entry into a new market etc.

To enable the management to take decisions, they need information. Only then can they take rational, scientific decisions.

3] Controlling

In controlling, managers compare the actual numbers of the firm with the planned or budgeted numbers to identify any deviation and variances.

In case the performance of the firm is lacking then the reason for this is investigated. The idea is to bring the actual numbers as close to the planned numbers as possible.

One of the main aspects of control is the prompt correction of mistakes and inefficiency. For this managers need up-to-date information around the clock.

Read here the ideal characteristic of Ideal Costing System here in detail.

Costing – An Aid to Management

Costing - An Aid to Management

Costing – An Aid to Management basically means that cost accounting helps the management in carrying out most of its functions. It provides basic cost data and performs cost functions that provide the management will all the information they require.

It standardizes, records, analyzes, compares, reports and makes recommendations. Only financial accounting data will not suffice, as it will not provide the management will all the data it requires. A good cost account system helps the management in the following ways,

  • Classification of Costs: Costs are collected and then classified in various categories and under various heads. This provides more information about the type of costs and allows for cost ascertainment and finding the profitability of each area of activity or each product.
  • Control of Costs: Costing allows the management to keep control of materials, labour, and overheads. A check is kept on the stores and materials ledger. This points out any theft, loss etc. Costing also provides relevant information about labour costs via machine hours and labour capacity etc. It also classifies overheads as variable and fixed to help us control these costs.
  • Budgeting: These include the analysis of budgets and performance reports. First costing helps with forming the budget, i.e. the quantification of the plans of the management. Then it measures deviances of the budget from the actual performance numbers according to the performance report. It also helps find the reason for deviances and helps solve any problems.
  • Price Determination: One of the first things cost accounting is to do is make the distinction between variable and fixed costs. This allows the management to fix remunerative prices for their products according to the economic situation prevailing at the time.
  • Expansion Plans: If the management of a firm wishes to expand then this decision will be based on the information that costing provides. The entire expansion policy will depend on the cost of production at various production levels.

Solved Question for You

Q: Cost accounting helps the management get ____ output at minimum cost

  1. maximum
  2. minimum
  3. same
  4. none of the above

Ans: The correct answer is A. Cost accounting helps the management make the most of the limited resources.

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