Cost Accounting is the branch of accounting that is concerned more with the ascertainment, allocation, distribution and accounting aspects of cost.
• In other words, Cost Accounting is the branch of accounting which deals with the classification, recording, summarization and reporting of current and prospective cost.
- It helps businesses determine the cost of production and identify areas to reduce expenses.
- It is an internal reporting system.
Objectives of Cost Accounting:
1.) To ascertain cost:
- The primary objective of cost accounting is to determine the total cost incurred in the production of goods or services.
- It helps in identifying the cost per unit, which is essential for pricing and profitability analysis.
2.) To analyze cost and loss:
- Cost accounting analyzes costs under various heads such as material, labor, and overheads. It also identifies areas of inefficiency or wastage and pinpoints reasons for losses, enabling corrective actions.
3.) To control cost:
- By comparing actual costs with budgets or standards, cost accounting helps in identifying variances and implementing measures to control costs. It ensures that resources are used efficiently and waste is minimized.
4.) To help in fixation of selling price:
- Cost accounting provides accurate data on production and operational costs, aiding businesses in setting competitive and profitable selling prices.
5.) To aid the management:
- Cost accounting serves as a tool for management by providing detailed cost information, which supports planning, decision-making, budgeting, and performance evaluation.
Advantages of Cost Accounting:
- It helps in controlling cost by applying techniques like standard costing and budgetary control
- It provides necessary cost information to the management for planning and decision making.
- It helps to fix the selling price of products and services.
- It checks the accuracy of financial accounts.
- It enables comparison of actual costs with budgets or standards cost to identify variances.
Limitations of Cost Accounting:
1.) Lack of Uniformity:
- Cost accounting practices are not standardized across all organizations. Different businesses may use different methods, leading to inconsistency in cost data and making comparisons difficult.
2.) Conceptual Diversity:
- There are multiple methods and techniques in cost accounting, such as job costing, process costing, and activity-based costing. This variety can lead to confusion and differences in implementation across industries.
3.) Costly:
- Setting up and maintaining a cost accounting system requires more investment in terms of money, time, and expertise, which can be challenging for small businesses.
4.) Ignorance of Futuristic Situations:
- Cost accounting primarily focuses on historical data and current costs, which might not always reflect future trends, inflation, or changing market conditions.
5.) Lack of Double Entry System:
- Unlike financial accounting, cost accounting does not use a formal double-entry bookkeeping system. This can result in a lack of completeness and accuracy in recording and reporting costs.
6.) Developing Stage:
- Cost accounting is still evolving as a discipline. New techniques and tools are continuously emerging, but there are no universally accepted guidelines, which can lead to gaps in its practical application.
Similarities between Financial and Cost Accounting:
- Both provide information to the user so that they can make informed decisions.
- Both uses historical accounting data.
- Both of them focuses on improving business performance.
- Both of them disclose the operating result i.e. profit or loss of the business.
Dissimilarities between Financial and Cost Accounting:
