cost accounting definition

cost accounting definition

The Importance and Evolution of Cost Accounting in Modern Business

1. Introduction to Cost Accounting

The evolution of the cost accounting techniques absorbed the influencing factors of the marketplace, the requirements of the managers, the information technology available, and the characteristics of the market conditions. Each period in the evolution of cost accounting was the response of organizations to their environmental changes. The subject of cost accounting is a widely known and challenging specialty in the field of accountancy. The classification of costs, the way of their estimation and presentation, and the recording and reporting concepts and principles have been changing and evolving over the years. The adjustment of the cost system to such changes is not an easy task, but the reliability of cost information is an essential and basic requirement in the dynamic and competitive contemporary business environment. The objective of this chapter is to depict the evolution of cost accounting and to delineate the pertinent issues that business is experiencing in the turbulent marketplace.

Business today has evolved in many ways and cost accounting has evolved with it in terms of valuing assets, reporting results, and giving information to management. The structure of an organization has a forceful impact on the behavior and performance of its members. The cost accountant provides management with information about cost for various organizational components, e.g. products, services, customers, departments, regions, processes, projects, and factories. Such information influences internal decision making, external financial statement valuation, management of an organization, employee behavior, and customer relations. The concept of cost accounting, management accounting, and control go back to the vision of the industrial North of England, and particularly Lancashire. Cooperation in the family formed the basis for factory reforms and laid the foundations for ‘costing’ and ‘cost accounting’, as we know them today. This was the beginning of integrated cost accounting patterns aimed at estimating and accumulating their total costs.

2. Historical Development of Cost Accounting

The historical development of the concepts of cost and cost accounting probably dates as far back in time as the emergence of the social system. It can certainly be stated that serious consideration of these concepts started much before economic science established itself as a separate intellectual discipline. And through the years, cost accounting has followed the broad change in economic conditions. Developed in very simple forms, cost accounting practice became increasingly important with the acceleration of the industrial revolution.

The problem, therefore, was to economize factory space. But the great difficulty was to find some means by which the articles made up for the different departments could be easily ascertained, and the amount of work which had been done upon any one brought to light, without having recourse to the tedious and imperfect method of actual inspection of each article or its components.

3. Key Concepts and Principles in Cost Accounting

To exhibit the above said three principles of admeasurement of the cost of goods and services to be supplied and exercise of process that assist the control of the cost is indeed the function of cost accounting department for which usually a complete coverage of bookkeeping is desired. It is on account of these basic principles that the tools of cost accounting have a unique place in cost analysis literature while numerous queries on tools are available these days.

Principles that explain the meaning of cost and the methods of measuring cost are also the tools of cost accounting. These principles stipulate the scope of cost data and their mode of presentation. Although these principles for their presentment are certainly known as soon as the accounts are advised by the costing theories. The three basic principles of cost accounting are: First, admeasurement of the cost of goods and services to be supplied which includes the products which are not completed; second, exercise of process of that assist the control of the cost by the cost accounting department; and third, exercise of the process that assist the control of the cost by the person who execute the process.

4. Role of Cost Accounting in Business Decision Making

Primarily, cost accounting functions as an internal tool that draws its financial data from the general ledger or cost reports. It presents cost data in such a way that it is interpreted and easily understood by managers. The system is designed to serve the special needs of specific management compartments within an organization. It is used for reporting to the president, CEO, department manager, treasurer, head of a cost center, and many others. The cost accounting system also assists in management control by identifying problems and variances in the form of exceptions and the costs associated with those problems. When significant or specific problems are identified, resolution can be undertaken. Finally, cost accounting assists in planning and decision-making by supplying cost data necessary to predict the financial consequences of alternative identified options.

Cost accounting is a process of accumulation, manipulation, and interpretation. In cost accounting, costs are recorded in the books or records as they are incurred. Then, they are manipulated and interpreted for specific complaints, special kinds of designing control, and assistance in management planning and making decisions. Thus, the role of cost accounting in business decision making is to inform management about the possible impact that costs may have on the important decisions likely to be made in the near future.

5. Modern Applications and Technologies in Cost Accounting

In conducting this review of cost accounting in the last four centuries, one of the principal reasons was to show the various evolutionary techniques that have taken place and to reflect old wisdom on the latest, most modern approaches and technologies. The last thirty years have seen significant advances in the areas of general and cost management, and cost accounting. Many of these advances have been fueled by and fueling the development of the modern computer and communications technology. These advances have included innovations in information systems, costing techniques, quality management, performance management, production and operations management, and increasingly, the management of human resources. All have their place in a wider ‘basket’ of modern management tools, providing managers with a range of techniques available to help them in their quest for greater efficiency, effectiveness, decision-making, and competitive advantage.

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