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Unit 1.introduction To Cost Accounting

Unit 1 provides an introduction to cost accounting. It defines cost accounting as the process of determining and accumulating the cost of products or activities. The objectives of cost accounting are outlined as determining selling prices, controlling costs, providing information for decision-making, ascertaining profit, and facilitating financial statement preparation. Cost accounting is important for management as it helps with cost ascertainment, price fixation, identifying unprofitable activities, and checking the accuracy of financial accounts. However, cost accounting also has some limitations, such as being expensive to implement and results sometimes differing from financial accounts.

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45 views2 pages

Unit 1.introduction To Cost Accounting

Unit 1 provides an introduction to cost accounting. It defines cost accounting as the process of determining and accumulating the cost of products or activities. The objectives of cost accounting are outlined as determining selling prices, controlling costs, providing information for decision-making, ascertaining profit, and facilitating financial statement preparation. Cost accounting is important for management as it helps with cost ascertainment, price fixation, identifying unprofitable activities, and checking the accuracy of financial accounts. However, cost accounting also has some limitations, such as being expensive to implement and results sometimes differing from financial accounts.

Uploaded by

Clark Jamiel Luangco Martija
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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Unit 1 Introduction to Cost Accounting

1.1 DEFINITION, SCOPE, OBJECTIVES OF COST ACCOUNTING


Managers need detailed information about the working of the business to
enable the plan, control, and make decisions. The cost and management accounting
systems provide financial information regarding the financial aspects of business
performance needed by management.

1.1.1 COST ACCOUNTING


Cost Accounting is the process of determining and accumulating the cost of
product or activity. It is a process of accounting for the incurrence and the control of
cost. Cost accounting is the establishment of budgets, standard costs and actual costs of
operations, processes, activities or products and the analysis of variances profitability
or social use of funds.

Cost accounting and management accounting are terms which are used
interchangeably. However, this is not entirely right.

1.1.2 FINANCIAL ACCOUNTING AND MANAGEMENT ACCOUNTING


Financial accounting is the classification and recording of the monetary
transaction of an entity in accordance with established concepts, principles, accounting
standards and legal requirements and their presentation by means of profit and loss
accounts, balance sheet and cash flow statements, during and at the end of an
accounting period.

Many businesses have a financial accounting system with a nominal ledger,


sales ledger and purchases ledger and books of prime entry for recording transaction
that have occurred during a given period.

Financial accounts Management accounts


 Limited companies are required  There is no legal requirement to
by law to prepare financial prepare management accounts.
accounts.
 The law and financial reporting  Management accounting formats are
standards prescribe formats of entirely at the discretion of
published financial statements. management.
 Most financial accounting  Management accounts incorporate
information is of a monetary both monetary and non-monetary
nature. measures.
 Financial accounts present an  Management accounts are both
essentially historic picture of historical record and future planning
past operations. tool.
1.1.3 SCOPE OF COST ACCOUNTING
A cost accounting system is a system used by an organization to gather, store
and analyse data about costs. The purpose of a cost accounting system is to provide
management information about costs and profits.

A cost accounting system is often the basis for a management accounting


system. The term cost accounting and management accounting are often used to mean
the same thing, although strictly there are differences.

1.1.4 OBJECTIVES OF COST ACCOUNTING


1. Determining Selling Price
2. Controlling Cost
3. Providing information for decision-making
4. Ascertaining costing profit
5. Facilitating preparation of financial and other statement.

1.1.5 IMPORTANCE OF COST ACCOUNTING


The limitation of financial accounting has made the management to realize the
importance of cost accounting. The importance of cost accounting are as follows:
1. Importance to management
a. helps in ascertainment of cost
b. aids in Price Fixation
c. helps in Construction
d. elimination of wastage
e. helps in identifying unprofitable activities
f. helps in checking the accuracy of financial account, fixing selling
process, inventory control and estimate
2. Importance to Employees
It benefits employees through incentives plan in their entire enterprise.
3. Cost Accounting and Creditors
They can base their judgement about the profitability and prospects of
the enterprise upon the studies and reports submitted by the cost
accountant.
4. Importance to National Economy
Overall economic development of a country takes place due to efficiency
of production.
5. Data Base for operating policy

1.1.6 LIMITATIONS OF COST ACCOUNTING


1. It is expensive, because analysis, allocation and absorption of overheads
require considerable amount of additional work.
2. The result shown by cost accounts differ from those shown by financial
accounts. Preparation of reconciliation statements frequently is necessary
to verify their accuracy.
3. It is unnecessary because it involves duplication of work.
4. Costing system itself does not control costs.

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