Fundamentals of Cost Accounting

Origin and Evolution of Cost Accounting

Cost accounting is not a new concept. It’s been around for ages. It is the perfect way for all businesses and organization to keep track of their activities and costs. It is a very advantageous companion to traditional financial accounting. Let us learn a bit more about the evolution and history of cost accounting.

Evolution and History of Cost Accounting

Origin and History of Cost Accounting

The age of the industrial revolution resulted in the first swept of large businesses and organizations. So these organizations were more complex and dynamic. This is what lead to the invention of what is now the modern cost accounting process in use.

So the origin and evolution of cost accounting can be traced back to the industrial revolution. The idea was to help the businessmen to record and keep a track of their costs and expenses.

Before the golden age of industrialization,  most of the expenses of these businesses are what we would categorize as variable costs. The costs related to labour, materials, and other such variable costs.

However, when industrialization took off, these businesses had more ‘fixed costs’. These are costs that are not directly related to the production of goods or services. Some examples of fixed costs are rent, depreciation, storage costs etc.

As railroads, steel industry and other such large industries developed, understanding fixed costs became important. Allocating them became of importance to managers and owners for their decision making, pricing, and product development. And this was the origination of modern cost accounting.

History of Cost Accounting

Evolution of Cost Accounting

The environment of a business in the modern world is very complex and dynamic. A business has to navigate many complex factors such as competition, new entrants, risks, uncertainty etc.

This makes the running and expansion of these companies that much more complex and difficult. This what not the case before industrialization when the businesses were small and in a relatively simpler environment.

So for the successful management of a business in the current modern world, they require a lot of input and processes.

Understand the meaning of Cost, Costing and Cost Accounting here in detail.

Only traditional financial accounting is not sufficient for effective management of medium and large size organizations. So with time, there was the origin and evolution of a branch of financial accounting – the cost accounting process.

And then in the last few decades, cost accounting has seen rapid evolution and growth in the business world. New procedures and techniques were developed to further refine the process of cost accounting.

The idea behind developing cost accounting was to negate the limitations of the traditional accounting system. So cost accounting will help the organization’s control costs and maximize efficiency, something financial accounting cannot offer.

With time these scientific methods lead to standards being formed. These standards on cost accounting aim at the uniformity of methods amongst an industry or an economy. And with time there was the development of cost audit, to review and examine the records of cost accounting.

Solved Example on Origin and Evolution of Cost Accounting

Q: After the origin and evolution of cost accounting ________ was the next development in the field of accounting

  1. Financial Accounting
  2. Standard Accounting
  3. Management Accounting
  4. None of the above

Ans: The correct option is C. It is a recent development and is being employed by many organizations.

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