Fundamentals of Cost Accounting

Importance of Cost Accounting

Cost accounting is a specialized branch of accounting that deals with the classification, recording, and allocation of current costs and prospective costs. In the modern commercial world, it is one of the most important techniques or process for a business. The management of an organization and its workers both greatly benefit from it. Let us see how in the importance of cost accounting.

Importance of Cost Accounting to Management

Importance of cost accounting

As we will see, cost accounting has many advantages. It holds importance to many different parties of business. Management, investors, employees, government and even consumers themselves benefit from cost accounting.

Let us look at some of the importance of cost accounting to the management of an organization,

1] Classification of Costs

Cost is a very generic term, it needs to be classified to be of further use. Cost accounting involves the recording and classification of such costs.

Some costs are prime cost, direct cost, factory cost, selling cost etc. Such classification allows the management to control the costs and ascertain the profitability of any such processes and activities. It also helps in calculating efficiency.

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2] Cost Control

An efficient business focuses on controlling the cost of inventory, labor, and various other overhead costs. Cost accounting allows them to do so.

For example to achieve maximum efficiency in their inventory management the can adopt the EOQ technique which is a costing technique.

Similarly, by analyzing costs of labor and capacity of machinery their efficiency can be improved also. Cost accounting also classifies overheads into fixed, variable or controllable, uncontrollable to achieve cost control.

Understand the difference between Financial Accounting and Cost Accounting here in detail.

3] Price Determination

Cost accounting makes the basic distinction between fixed and variable costs. This is then used by management to fix the prices of products, according to the costs of the product.

This allows the management to find the most ideal price for the product or the service, not too high and not too low. Take for example a case where the economy suffers depression.

The businessman has to lower the prices of his products to survive these circumstances. So he can begin by trying to control his variable costs allow him to fix his prices.

4] Fixing of Standards

Organizations use standards to make estimates and budgets for the future. They use these as a basis to measure the actual efficiency of the process or department.

There is an entire branch in cost accounting known as Standard Costing dedicated to this process.

Importance of Cost Accounting to Others

  • Workers: One of the biggest uses of cost accounting is that it helps us calculate efficiency. This will help the company come up with an incentive scheme for workers who show efficiency in their work, and thus they will be awarded accordingly. It is also an incentive for workers with lower efficiency to do better.
  • Government: Costing helps the government when assessing for income tax or any other such government liabilities. It also helps set industry standards and helps with price fixing, tariff plans, cost control etc.
  • Customers: The main aims of costing are cost control and improvement in efficiency. Both of these are very beneficial to the company. And ultimately this benefit passes on to the customers of the products or services.

Solved Question for You

Q: How is costing beneficial to investors of the company?

Ans: Creditors and investors always check if the company has a sound financial system before investing with them. A sound costing system will ease their concerns and help them make their decisions.

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