Cost accounting: is a form of managerial accounting that aims to capture a company's
total cost of production by assessing the variable costs of each step of production as well as
fixed costs, such as a lease expense.
Cost accounting is used by a company's internal management team to identify all variable and
fixed costs associated with the production process. It will first measure and record these costs
individually, then compare input costs to output results to aid in measuring financial
performance and making future business decisions. There are many types of costs involved in
cost accounting, which are defined below. Types of Costs
Fixed costs are costs that don't vary depending on the level of production. These are usually
things like the mortgage or lease payment on a building or a piece of equipment that
is depreciated at a fixed monthly rate. An increase or decrease in production levels would
cause no change in these costs.
Variable costs are costs tied to a company's level of production. For example, a floral shop
ramping up their floral arrangement inventory for Valentine's Day will incur higher costs when
it purchases an increased number of flowers from the local nursery or garden center.
Operating costs are costs associated with the day-to-day operations of a business. These costs
can be either fixed or variable depending on the unique situation.
Direct costs are costs specifically related to producing a product. If a coffee roaster spends five
hours roasting coffee, the direct costs of the finished product include the labor hours of the
roaster and the cost of the coffee beans.
Indirect costs are costs that cannot be directly linked to a product. In the coffee roaster
example, the energy cost to heat the roaster would be indirect because it is inexact and
difficult to trace to individual products.
Following are the main objectives of cost accounting:
1. To ascertain the cost per unit of the different products manufactured by a business
concern;
2. To provide a correct analysis of cost both by process or operations and by different
elements of cost;
3. To disclose sources of wastage whether of material, time or expense or in the use of
machinery, equipment and tools and to prepare such reports which may be necessary to
control such wastage;
4. To provide requisite data and serve as a guide for fixing prices of products manufactured or
services rendered;
5. To ascertain the profitability of each of the products and advise management as to how
these profits can be maximised;
6. To exercise effective control if stocks of raw materials, work-in-progress, consumable stores
and finished goods in order to minimise the capital locked up in these stocks;
7. To reveal sources of economy by installing and implementing a system of cost control for
materials, labour and overheads;
8. To advise management on future expansion policies and proposed capital projects;
9. To present and interpret data for management planning, evaluation of performance and
control;
10. To help in the preparation of budgets and implementation of budgetary control;
11. To organise an effective information system so that different levels of management may
get the required information at the right time in right form for carrying out their individual
responsibilities in an efficient manner;
12. To guide management in the formulation and implementation of incentive bonus plans
based on productivity and cost savings;
13. To supply useful data to management for taking various financial decisions such as
introduction of new products, replacement of labour by machine etc.;
14. To help in supervising the working of punched card accounting or data processing through
computers;
15. To organise the internal audit system to ensure effective working of different departments;
16. . To organise cost reduction programmes with the help of different departmental
managers;
17. To provide specialised services of cost audit in order to prevent the errors and frauds and
to facilitate prompt and reliable information to management; and
18. To find out costing profit or loss by identifying with revenues the costs of those products or
services by selling which the revenues have resulted.
Objectives of cost accounting are ascertainment of cost, fixation of selling price, proper
recording and presentation of cost data to management for measuring efficiency and
for cost control and cost reduction, ascertaining the profit of each activity, assisting
management in decision making and determination
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Objective and Function of Cost Accounting:
The main objective and function of cost accounting are mentioned below:
1. To Ascertain Cost: The main objective of cost accounting is to ascertain the cost of goods
and services. The expenses that are incurred while producing goods or rendering services are
called costs. Some examples of costs are material, labor and other direct and indirect
expenses. Under cost accounting, cost are collected, classified and analyzed with the aim of
finding out the total as well as per unit cost of goods, services, processes, contract etc.
2. To Analyses Cost and Loss:
Another objective of cost accounting is to analyze the cost of each activity. The analysis of cost
is necessary to classify the cost into controllable or uncontrollable, relevant or irreverent,
profitable or unprofitable etc. similarly, under cost accounting the effects of material, idle
time, breakdown or damage of machine on the cost is also analyzed.
3. To Control Cost:
Cost control is a technique that is used to minimize the cost of product and services without
compromising on the quality. Cost accounting aims at controlling the cost by using various
techniques, such as standard costing and budgetary control.
4. To Help in Fixation of Selling Price:
Another important objective of cost accounting is to help in fixation of selling prices. The costs
are accumulated, classified and analyzed to ascertain cost per unit. The selling price per unit is
calculated by adding a certain profit on the cost per units. Under cost accounting, different
techniques such as job costing, batch costing, output costing services costing etc are used for
determine the selling price.
5. To Aid the Management:
Cost accounting aims at assisting the management in planning and its importations by
providing necessary costing information that also enable the evaluation of the past activities as
well as future planning.
