objectives of cost accounting

objectives of cost accounting

Exploring the Objectives of Cost Accounting

1. Introduction to Cost Accounting

As we have mentioned earlier, the first objective to be reviewed is the providing of relevant information for cost-effective decision-making purposes. It is also true to say that if decision making does not incorporate all the past, relevant, and future cost tradeoffs, such decisions are of little value. We rely heavily on the flow of testable reported benefit-to-cost information from acceptable cost accounting principles of recording data for decision making. Set up normative standards to guide evaluation and utilization of cost accounting’s decision-making function. It is also imperative to indicate how those principles have been evaluated and accepted to function effectively. The information cost accounting systems report relevant to management’s decision making and control functions must be structured on the basis of the actual operating needs of management. It means that the needs of the operating users are determining the nature and flow of cost accounting information requirements. Even though cost accounting information desires of a group of users come primarily from the broad general economic data, shape the accounting reports to suit their needs. On the same note, the objectives of the cost accounting system are determined by performance-relevant constructs, creating the necessity to develop the most appropriate guideline for the decision-making process.

In the following pages, we will take a close look at the competing cost accounting objectives, which include providing relevant cost information for decision making, providing relevant cost reports to stockholders, cost reduction, optimal product mix, and efficiency.

Cost accounting has been developed and started playing a vital role in the successful management of business operations. Writer after writer contends that the cost accounting concept, when employed and executed purposefully and objectively, is a dynamic headlamp revealing to management the path that leads to the goal of minimum cost in operations. Cost accounting offers guidelines to be adopted to realize such a goal. This discipline relieves high managerial echelons from making cost decisions for which they do not command requisite information or time necessary. It provides the basic, simple information necessary to establish a cost system and to record items to properly value goods manufactured. It supplies the essential data necessary for establishing price control over operations and for comparing actual costs with standard costs.

2. Key Objectives of Cost Accounting

c) For decision making: This objective complements cost determination but stresses that all data are needed – not only costs but also associated revenues and benefits. The desired objective is to provide a maximum or near-maximum reward or added value. Management is not concerned with costs alone; it is concerned with the relationship of cost to the benefit and profit resulting from incurring that cost. In this complex world of intensifying competition and rapid technological and social change, optimum decision making is impossible unless proper standards are initiated and maintained.

b) To provide bases for control: Cost accounting provides the basis for control through the comparison of actual costs with the standards set. The power of control can be exercised only to the extent that costs can be related to quantifiable items of input or output. Cost accounting provides the means of correlating costs with factors that can be measured and related to a specific product. This, in turn, makes possible the control of costs. Within any accounting period, it is only through this process that control and thus flexibility can be exercised with reference to costs.

a) To ascertain the cost: The primary objective of cost accounting is to ascertain the cost. To find it, we must take into account as many costs, both variable and fixed, as feasible and necessary. Short-run and long-run costs need to be recognized, but even over the long run, profit planning becomes less and less profitable because the market can take care of itself if cost accounting estimates the cost of each output at alternative plant levels instantaneously.

Key objectives of cost accounting are discussed as follows:

3. Methods and Techniques in Cost Accounting

Decisions based on data obtained from costing serve as guidelines for the future activities of an enterprise. For effective functioning, the cost accounting methods are used to a large extent. The tools of cost accounting thereby provide the necessary flexibility to this management accounting concept, helping to meet the objective. They help to translate into practice the allocation of overheads in the most rational manner. The key benefits associated with this are that it helps to take decisions on pricing of the final product, resource allocation in the various areas of the enterprise. The techniques of costing also give a check on all other activities and assist the management in monitoring and controlling those activities in a very effective manner. The major benefit is that it is cost-effective in nature.

Subheading 1: Cost Accounting – Objectives and Techniques Cost accounting determines the actual outlay of expenditures for a specific measuring unit. In pluralistic economies, cost accounting serves as an important discipline focusing attention on the utilization of scarce resources. It involves a process of finding out, presenting, and analyzing the cost incurred. It deals with the cost of products and cost centers. The cost presented and used by the management is variable, and the principle of relevance is being adhered to. This method cost is presented and used by the management in accordance with the requirements of the situation. Through cost accounting, the cost of production or process shows the necessary particulars. These are the prime reasons why cost accounting is considered to be a multidimensional discipline.

Methods and techniques in cost accounting facilitate the effective implementation of cost accounting as a decision-making tool. Important methods used include marginal costing, standard costing, and budgetary control. Among the various techniques, cost sheet, reconciliation of cost and financial accounts, and statements for key factor analysis, make or buy decisions, and decision making based on limiting factor are some of the significant tools in cost accounting.

4. Importance of Cost Accounting in Decision Making

In the present-day dynamic business environment, every hint of information is used as a potential tool for the success of the organization. The cost of information, whatever it may be, finds an important place in the decision-making process. The cost information may act as a part of decision-making criteria or as internal checks and balances. In any event, the accuracy and the timeliness of information are the heart and soul of the successful cost information system. The first and foremost important decision facing management with regard to cost information may be stated as how to measure the cost accurately so that descriptive, predictive, or predictive information is made meaningfully possible. Cost information must be relevant to the decision at hand and users at a particular level in the organization so that actions taken from such decisions may actually result in organizational goals.

Cost accounting serves as a supply information system to management and assists the management in decision-making. It supplies necessary information for policy formulation and day-to-day decisions which are of an elementary and routine nature. Cost accounting supplies relevant information to every level of management for enabling them to play an effective role in the decision-making process. In these functions, accounting properly organized its most natural is to offer the needed type of costing in support of decision making process at different levels in the management hierarchy.