Fundamentals of Cost Accounting

Scope and Functions of Cost Accounting

Did you know that the modern version of cost accounting originated during the Industrial Revolution? As businesses began to grow in scale, the need for keeping track of costs arose. From only concerning ourselves with variable costs, cost accounting has come a long way. Let us take a look at the scope and functions of cost accounting.

Scope of Cost Accounting

The scope of cost accounting is actually quite wide. It mainly consists of three main aspects. Let us take a brief look at them.

1] Cost Ascertainment

This is one of the main criteria for cost accounting. Cost ascertainment is the process of collection of expenses and by analysis of these expenses. It links up the production of various products at their different stages of production with such expenses.

Over time we have seen the development of a variety of production processes, and so different systems of costing were also developed.

Examples include historical cost, actual costs, standard costs etc. And linking of these expenses with the manufacturing process occurs via many techniques such as marginal cost technique, direct cost technique etc.

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2] Cost Accounting

This is the process of accounting for the costs of a firm. Classifying and recording of costs is the first step in the process. The end result is the preparation and presentation of this statistical data in an acceptable format.

Cost accounting is almost as crucial to management as financial accounting. It allows them to make decisions. And if the cost accounting and financial recording statements are separate, they must be reconciled at year-end.

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

3] Cost Control

Cost control is the process by which action is taken to reduce the costs and expenses to boost profitability and efficiency.

The idea is to bring the actual figures as close to the target or budgeted figures as possible. This involves the regulation of any costs that deviate from the target.

Functions of Cost accounting

Functions of Cost Accounting

To understand the entire cost structure of a firm, cost accounting is crucial. It ascertains the costs of various products, processes etc.

So we can compare them to the sales and arrive at the true profitability of the firm. This is one of the main objectives or functions of cost accounting. To achieve this the actual functions of cost accounting change daily. Let us take a look,

  • ascertain the cost per unit of every product that the company manufactures
  • to identify any wastages whether in material, expense, time, tools and spares etc. Also, suggest ways to minimize this wastage
  • also, provide data that helps in the process of price fixing
  • calculate with accuracy the profitability of each of the company’s products. And figure out ways to maximize these profits
  • cost accounting is also responsible for the control of raw material and raw material ordering. So it must ensure that we are not overordering which leads to capital being locked-up unnecessarily. And underordering will lead to inefficiency in the manufacturing process,
  • also, perform the functions of cost control for materials, labor, and other miscellaneous expenses
  • present data to the management that allows them to interpret the data and make business decisions
  • help management with incentive plans that are based on efficiency
  • also, help the management with the preparation of budgets and setting up budgetary controls

Solved Question for You

Q: Cost control and cost reduction are the same things. True or False?

Ans: This is False. Cost control is the maintaining of costs as per the standards and the budget. Cost reduction, on the other hand, is to reduce the unit cost of a product without affecting the quality of the product.

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