Meaning
of Cost Accounting :
Previously, cost accounting was merely
considered to be a technique for the ascertainment of costs of products or
services on the basis of historical data. In course of time, due to competitive
nature of the market, it was realized that ascertaining of cost is not so
important as controlling costs. Hence, cost accounting started to be considered
more as a technique for cost control as compared to cost ascertainment. Due to
the technological developments in all fields, cost reduction has also come
within the ambit of cost accounting.
Cost accounting is, thus, concerned with
recording, classifying and summarizing costs for determination of costs of
products or services, planning, controlling and reducing such costs and
furnishing of information to management for decision making.
According to Charles T. Horngren, cost
accounting is a quantitative method that accumulates, classifies, summarizes
and interprets information for the following three major purposes:
§ Operational planning and control
§ Special decisions
§ Product decisions
According to the Chartered Institute of
Management Accountants, London, cost accounting is the process of accounting
for costs from the point at which its expenditure is incurred or committed to
the establishment of the ultimate relationship with cost units. In its widest
sense, it embraces the preparation of statistical data, the application of cost
control methods and the ascertainment of the profitability of the activities
carried out or planned.
Cost accounting, thus, provides various
information to management for all sorts of decisions. It serves multiple
purposes on account of which it is generally indistinguishable from management
accounting or so-called internal accounting. Wilma has summarized the nature
of cost accounting as “the analyzing, recording, standardizing, forecasting,
comparing, reporting and recommending” and the role of a cost accountant as “a
historian, news agent and prophet.” As a historian, he should be meticulously
accurate and sedulously impartial. As a news agent, he should be up to date,
selective and pithy. As a prophet, he should combine knowledge and experience
with foresight and courage.
Development
of Cost Accounting :
The common impression that cost accounting development from
financial accounting during last fifty years seems to be incorrect.
The belief that cost accounting development after the rise of
factory system as result of industrial revolution in England in the 18th
century, is also not true. Some cost accounting principles were found in
application as early as the 14th century. Some authorities suggest
that, the present-day cost accounting procedure was established before the end
of the 19th century. However, major developments in the subject were
noticed during a quarter century before the end of the Second World War. The
scientific management movement led to the development of standard efficiency.
After 1945, the need for data in planning for the future was felt and cost
accounting developed further.
The main causes behind the development of cost accounting system
may be enumerated as below:
- Financial Accounting can
give the net result of trading during a particular period. It cannot give
(normally) the product- wise picture nor can it say that the result obtained
is, what it should be.
- Financial Accounting
does not find out the cost of the goods manufactured and hence it fails to
help the most important business activities like price-fixing,
price-cutting during depression, formulating market policies etc.
- Financial Accounting
never aims at making an effort for converting a losing unit into a
profitable one through cost control.
- Financial Accounting
does not provide means for controlling different elements of cost,
reduction of expenses, elimination of wastage, measurement of levels of
efficiency etc.
- Financial Accounting
presents the total cost as incurred during a period and that also, at the
end of the period. It cannot present the cost incurred daily and in the
absence of this day-to –day information, control becomes impossible.
- Financial Accounting
also fails to explain properly the result with appropriate break-up.
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