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.