NATURE AND SCOPE OF COST ACCOUNTING

Limitations of Financial Accounting:-

Following are the various limitations of financial accounting

1. It does not provide clear idea about operational efficiency of the business.
2. It does not spotted out weakness of the business from its collective
results.
3. It is not helpful for the fixation of selling price.
4. It does not classify expenses and account of the business.
5. It does not provide data for comparison and decision making.
6. It does not control various cost of the business.
7. There is no standard for assess the performance of business.
8. It provides only historical data.
9. It does not analyse the losses of the business.
10.It does not provide adequate information for the preparation of report.

Cost:-It is the exchange value of a product or services.

Costing:-Costing is a techniques and process of ascertaining costs of product or

services .Technique includes rules and principles applicable for the
determination of cost and process includes various routine for the determination
of cost.

Cost Accounting:-Cost Accounting is the classifying, recording, appropriate

allocation of expenditure for the determination of cost of product or services,
and for the presentation of suitably arranged data for the purpose of cost control
and guidance to the management.

Characteristics of Cost Accounting:-

Following are the various characteristics of Cost Accounting.

1. It is branches of accounting for costs.

2. It records income and expenditure related to production of goods and
services.
3. It provides information relating to cost of every job, work order process
or operation of the organisation.
4. It provides statistical data on the basis of which future estimates are
prepared and quotations are submitted.
 5. It is related with cost ascertainment, cost presentation, evaluation of
performance, cost control and cost reduction.
6. It helps to prepared budgets and standard so that actual costs may be
compared to find out the deviation.
7. It helps in the presentation of right information to the right person at the
right time in order to make important decision and cost control.

Difference between Costing and Cost Accounting:-

Basis Costing Cost Accounting
1.Nature 1. It is a techniques and 1. It is a branch of
process of accounting for cost.
ascertaining cost.
2.Scope 2. Costing includes 2. It involves classification
techniques and process accumulation and control
which tells us the of cost.
procedure of ascertaining
the cost of product or
services.
3.Process 3. Costing includes the 3. It involves process like
process like historical recording, classifying and
costing, standard costing appropriate allocation of
and marginal costing. expenditure for cost
determination.
Cost Accountancy:-Cost Accountancy is the application of costing and cost
accounting principles, methods and techniques to the science, art and practice of
cost control and the ascertainment of profitability.

Scope of Cost Accountancy:-

Following are the various scope of Cost Accountancy.

1. Cost Ascertainment:-Costing and Cost Accounting techniques are used

for the ascertainment of cost. It deals with the collection and analysis of
expenses, the measurement of production of different product at the
different stages of manufacture and linking up production with the
expenses.
2. Cost Accounting:- Cost Accounting is the process of accounting for cost
which begins with recording of expenditure and ends with preparation of
statistical data. It is a formal mechanism by means of which cost of
products or services are ascertain and control.
 3. Cost Reduction:-Cost reduction is a technique under which cost of
products or services and reduce due to cost reduction without impairing
suitability and quality of the goods and services.
4. Cost Control:- Cost control is a process which is undertaken by the
business to control the cost of product or services. Under cost control the
actual cost of manufacturing goods and services are compared with that of
budgeted cost. If any deviation occurs necessary action are taken to solve
the problem.
5. Cost audit:- Cost audit is the verification of the correctness of cost
accounts and a check on the cost accounts plans. Its main purpose is to
ensure that cost accounting and other records are arithmetically correct or
not.

Objectives of cost accounting:-

Following are the important objectives of cost accounting.

1. To ascertain the cost per unit of different products manufacturing by a

business.
2. To provide correct analysis of cost both by process or operations and by
different element of cost.
3. To disclose source of wastage whether in material, time or expenses or in
the use of machinery, equipments and tools etc.
4. To provide data for fixation of selling price of product manufactured.
5. To ascertain the profitability of each product manufactured and advice the
management to maximise profit of the business.
6. To help in the effective control of stock 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 material, labour and overheads.
8. To advice management on future expansion policies and proposed capital
project.
9. To present and interpret data for management planning, decision making
and control.
10. To helps in the preparation of budgets and implementation of budgetary
control.
Advantages of cost accountancy:-

Following are the various advantages of cost accounting.

1. Advantages to management:-
a. It discloses profitable and unprofitable activities of the business.
b. It measures the efficiency of different department and activities with
the help of cost accounting data.
c. It is helpful in controlling cost by eliminating and reducing all possible
wastages and losses.
d. It is helpful in cost reduction and profit maximisation.
e. It is helpful for decision making process of the organisation.
f. It provides reliable data for proper utilisation of limited resources.
g. It provides data for the fixation of selling price of the product.
h. It guides future production policies and expansion.
i. It helps to prevention of frauds and errors with the help of cost audit.

2. Advantages to creditors and investors:-

Cost account helps to creditors and investors to judge the financial

strength and credit worthiness of the business.

3. Advantages to the government:-

Cost account is helpful for the assessment of excise duty and income tax
and for the information of policies regarding industry, export, import
taxation etc. It is also helpful for the preparation of national plan for
economic development. It provides really figures for use by the
government for application to problems like price fixation, price control,
and wage level fixation, payment of dividends or settlements of disputes.

4. Advantages to the consumer:-

Cost accounting provides cost data to the organisation for cost control
and cost reduction. The reduction of cost reduces. The purchase price of
goods and services which is advantageous to customers.

5. Advantages to the workers:-

Cost accounting helps the management for the fixation of fair

remuneration to workers. It is also helpful for the preparation of incentive
scheme.
Distinction between financial accounting & cost accounting:-
Basis Financial accounting Cost accounting
1. Purpose. 1. Financial accounting 1. It is prepared to
is prepared to know the ascertain cost per unit of
financial performance of the various products or services.
business.
2. Forms of 2. These accounts are
accounting. 2. These accounts are generally kept to meet the
kept in such a way that to requirement of management.
meet the requirement of
companies Act and income
3. Recording. tax Act. 3. It records the
expenditure to know the cost
per unit.
3. It classify, records and
analyse the transaction as per
4. Control. the nature of expenses.
4. It provides a detail
system of control for material
4. It focus on recording cost with the help of standard
transactions without giving costing & budgetary control.
importance to control.
5. Periodicity of 5. It gives information to
reporting management as and when
5. It reports operating required.
results and financial position
6. Analysis of of the business at the end of 6. Cost accounting
profit the year. analyse the profit or loss of
every product, job or services.
6. Financial accounting
7. Reporting of analyse the profit of business 7. In cost accounting cost
cost for current period. are broken down on a unit
basis.
7. In financial accounting
8. Nature of cost are reported in aggregate
transaction (total). 8. In cost-accounting
only manufacturing related
8. In financial accounting transactions are recorded.
9. Information only commercial transactions
of the business are recorded. 9. In cost accounting both
monetary and non-monetary
information are used.
9. In financial accounting
10. Fixation of only monetary information
10. Cost accounting is
selling price are used. maintained for fixing selling
price.

11. Stock 10. Financial accounting

 valuation is not maintained for fixation
of selling price. 11. In cost accounting
stock are valued to cost.
11. In financial accounting
stock are not valued at cost
price or market price
whichever is less.
Characteristics of an ideal costing system:-

Following are the important characteristics of an ideal costing system.

1. Suitability to the business:- An ideal costing system should be such

that it may be suitable to the business.
2. Simplicity:- The ideal costing system should be simple to understand by
the employees and management.
3. Flexibility:- The ideal costing system should be flexible so that it may
change as per the environment and circumstances.
4. Economical:- A good costing system must be economical for the
business in order to minimise the cost of production.
5. Comparability:- The ideal costing system must be comparable so that
current year data is compared with that of previous data.
6. Presenting data at desired time:- Under an ideal costing system the
data should be present at desired time so as to take important decision.
7. Co-operation by executives (employees):- The ideal costing system
must be co-operated by all employees and departments in order to
achieve the business goal.
8. Uniformity of forms:- All the forms and performance necessary to the
system should be uniform in size and quality.
9. Minimum clerical work:- Under an ideal costing system the clerical
work must be minimum for the employees.
10.Adequate wage procedure:- Under an ideal costing system the
employees must get adequate wages and salaries.

Disadvantages of cost accounting:-

Following are the disadvantages of cost accounting.

1. Records only past performance:-

Cost accounting does not show the current status of the company as all
the data recorded in historical valuation of transactions.
2. Costs keeps on changing every year:-
The cost of raw material, labour and other materials keeps on changing
due to different factors thus only estimation can be made regarding costs.
3. Proper maintenance is required:-
Proper recording of various books of accounts is necessary to
determine the cost of products or services. If proper books of accounts are
not maintain it will difficult to determine the cost properly.