Cost Accounting has become an essential tool of management – Explain

Cost Accounting has become an essential tool of management – Explain

Cost accounting is the process of 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.

Here critically examine the need and importance of cost accounting with reference to the inadequacies of financial accounting.

(a) Costing helps in periods of trade depression and trade competition –

In periods of trade depression the business cannot afford to have leakages which pass unchecked. The management should know where economies may be sought, waste eliminated and efficiency increased. The business has to wage a wax for its survival. The management should know the actual cost of their products before embarking on any scheme of reducing the prices of giving tenders. Adequate costing facilitates this.

(b) Aids in price fixation –

Though economic law & supply and demand and activities of the competitors, to a great extent, determine the price of the article, the cost to the producer does play an important part. The producer can take necessary guidance from his costing records.

(c) Helps in estimate –

Adequate costing records provide a reliable basis upon which tenders and estimates may be prepared. The chances of losing a contract on account of overrating or losing in the execution of a contract due to underrating can be minimized. Thus, “ascertained costs provide a measure for estimates, a guide to policy, and control over current production”.

(d) Helps in channeling production on right lines –

Costing makes possible for the management to distinguish between profitable and non-profitable activities profit can be maximized by concentrating on profitable operations and eliminating non-profitable ones.

(e) Wastages are eliminated –

As it is possible to know the cost of the article at every stage, it becomes possible to chock various forms of waste, such as time, expenses etc. or in the use of the machine, equipment, and tools.

(f) Costing makes comparison possible –

If the costing records are regularly kept, comparative cost data for different periods and various volumes of production will be available. It will help the management in forming future lines of action.

(g) Provides data for periodical profit and loss accounts –

Adequate costing records supply to the management such data as may be necessary for the preparation of profit and loss account and balance sheet, at such intervals as may be desired by the management.

It also explains in detail the sources of profit or loss revealed by the financial accounts thus helps in the presentation of better information before the management.

(h) Aids in determining and enhancing efficiency –

Losses due to wastage of material, the idle time of workers, poor supervision etc., will be disclosed if the various operations involved in manufacturing a product are studied by a cost accountant. The efficiency can be measured and .costs controlled and through it, various devices can be framed to increase efficiency.

(i) Helps in inventory control –

Costing furnishes control which management requires in respect of stock. of materials, work-in-progress and finished goods. (This has been explained in detail under the chapter “Material’s”)

(j) Helps in cost reduction –

Costs can be reduced in the long run when alternatives are tried. This is particularly important in the present day context of global competition cost accounting has assumed special significance beyond cost control this way.

(k) Assists in increasing productivity –

The productivity of material and labor is required to be increased to have growth and more profitability in the organization costing renders great assistance in measuring productivity and suggesting ways to improve it.

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