UNIVERSITY OF NUEVA CACERES

City of Naga

COST ACCOUNTING AND CONTROL

BASIC CONCEPTS ON COST ACCOUNTING

WHAT IS COST ACCOUNTING?

 It examines the cost structure of a business by collecting information about the costs
incurred by a company’s activities, assigning selected costs to products and services and
other cost objects, and evaluating the efficiency of cost usage.
 It is mostly concerned with developing an understanding of where a company earns and
loses money, and providing input into decisions to generate profits in the future.

Simply put, it is that branch of accounting dealing with the classification, recording,
allocation, and summarization and reporting of current and prospective costs.

THE NEED FOR COST ACCOUNTING

1. To overcome the limitations of financial accounting. Financial accounting records in an

overall manner the results of the operation of a business using the conventional double
entry bookkeeping. It suffers from the following limitations:
 It provides only past data.
 It reveals only the overall result of the business.
 It is static in nature.
 It fails to take into consideration the impact of price level change.
 Possibility of manipulation of financial accounting information.
 It fails to exercise control over resources.
 It fails to provide adequate data for management to carry out its functions.

2. To ensure optimum utilization of resources.

3. To achieve overall efficiency of business.

CHARACTERISTICS OF COST ACCOUNTING

 It is a specialized branch of accounting. Cost accounting is a specialized branch of
accounting which covers collection, classification, recording, apportionment,
determination and control of cost.
 Art and science both. It is a science because it has its own principles and rules, which are
followed on regular and in a systematic manner. It is also an art because its principles and
techniques are used in solving business problems through cost data.
 It is recognized as a profession.
 Determination of Various Components of Total Cost. It ascertains cost of product and
services through the process of accumulation, classification, analysis and recording. The
element of cost includes materials, labor and expenses.
  Application of statistical data of computing profit and cost. The extensive use of system
involves application of statistical data, control methods and techniques and determining
profitability. The statistical data are helpful in preparation of cost sheet, cost statement,
various cost accounts and are used for the purpose of cost comparison.
 Helpful to Management. The system provides information and measures for control and
guidance for various levels of management.

SCOPE OF COST ACCOUNTING

The scope of cost accounting is very broad. An organization having an effective cost accounting system
helps the management in the performance of their responsibilities in the efficient and effective manner.

 Classification of Cost.The classification of cost is the process of grouping costs according

to their characteristi cs . It can be classified according to elements, functions, nature,
controllability, normality and relevance to decision making.
 Cost Recording. After cost classification, the transactions are recorded in various ledger
accounts.
 Cost allocation. It includes allotment of whole items of cost to cost centers or cost units
according to predetermined basis.
 Cost Control. It is an importance aspect of cost accounting and for this purpose various
techniques such as standard costing, budgetary control, inventory control, and quality
control can be adopted.
 Cost Comparison. It refers to comparison of current cost with previous cost or cost of
similar other concerns.
 Cost Reporting. It means communication of cost data on a regular basis which may be
used by management for decision making or which are made available to government or
some outside agencies.
 Cost Reduction. It means permanent and genuine reduction of per unit cost of
produced or services rendered.
 Cost Analysis. It involves the estimation of relationship between costs and various
determinants of cost.
 Cost Audit. It means an examination of the appropriateness of the cost accounting system
adopted by business and effectiveness of its implementation.

OBJECTIVES OF COST ACCOUNTING

 Cost Ascertainment. The primary objective of cost accounting it to determine the cost of
production of every unit, job, operation, process, department or service. The technique of
ascertaining cost is known as “costing”.
 Cost control. It is one of the important functions of cost accounting. To measure the
efficiency of the organization or of the cost centers, the various operations involved in
the manufacture of products are carefully studied. Budgets and standards for the consumption of
materials, use of labor and for expending the overhead are to be set and compared with actual
performances.
  Cost Reduction. It refers to the real or genuine savings through permanent reduction in
cost of a product or service without impairing the quality and affecting its purpose for
which it was intended to be used.
 Ascertainment of profitability. It is the objective of cost accounting to ascertain the profit-
making capacity of that activity planned out being carried out and to compare the actual
profits made with their profitabilities. Differences are analyzed and efforts are made to earn the
maximum as per capacity.
 Determination of Selling Price. The supply price or the tender price of the product
depends upon the total cost-plus margin of profit which the businessman wants to make
depending upon the inter-plat of factors of demand and supply.
 Providing a Basis for Business Policy and Decision Making. The objective of cost accounting
is to help the management in the formulation of business policy and in decision-making.

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“It takes a dream to get started, desire to keep going and determination to
finish.” – Eddie Harris Jr.