Introduction to Scope and Functions of Cost Accounting
The Industrial Revolution in Europe gave rise to the modern version of Cost Accounting. In simple words, keeping track of all costs for an industrial organization is known as Cost Accounting. It is the role of a cost accountant to see that all types of costs are included properly during the accounting process. There are multiple scopes and functions of cost accounting that you should know properly. Here, you can find all the details. There is a big role of cost accounting in decision making for an organization. The large organizations hire experienced cost accountants who can be the support system.
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Scope of Cost Accounting
The leading scores of cost accounting are discussed here briefly. It is the function of the cost accounting department of an organization to work according to the scope.
1. Controlling Cost
For any business organization, cost control is one of the vital acts to execute as it affects the level of profit. Cost accounting reports give the organization a chance to sort out where cost control can be done without hampering the level of production.
A business entity can make the new budget according to the reduced cost and follow it for a period to check if it works.
2. Ascertainment of Cost
Cost accounting is done mainly to keep the data and design a business structure that can run on a specific cost. The business entities tend to follow this specific cost when implementing on production. This is known as the Ascertainment of cost.
Much of the process is done depending on the analysis. The proper analysis helps in ascertaining the right cost for the organization’s production. Different parameters of cost are included when the ascertainment analysis takes place. Some types of cost are actual costs, historical cost, marginal cost, etc.
3. Theoretical Needs
Cost accounting has its own theoretical value. It is statistically done and acts as the data to the company. Many entities go for cost accounting on a yearly basis as they can keep the records of the cost. Furthermore, the theoretical form of cost accounting helps the organization to make decisions regarding their business.
Cost Accounting Functions
There are multiple functions of cost accounting that an organization has to provide keenness. Only then can it run properly. The key functions of cost accounting are factually mentioned here:
Cost accounting is the process that exposes all the cost-related data for every department. This increases the transparency of every department. It assures the managerial board of the business entity for its proper functioning.
Ascertaining the cost for every unit of product that a business entity manufactures. It helps the organization to set the selling price.
Cost wastage is a potential danger for any business entity, and timely cost accounting helps to restrict it prominently. The managers can spot the fields where wastages are occurring and they can work on minimizing it.
After a successful cost accounting session, the managerial board can make an overall budget for an organization. Apart from the budget, the reports of cost accounting can help the executive board to activate plans for wagers and employees.
Cost accounting reports can be the best way to understand the spheres of the entity where no cost would be needed anymore. A business entity can discontinue that entity in such cases.
Roles of a Cost Accountant
The roles of cost accountant are given below in brief:
The primary role of a cost accountant is to set up proper communication with the heads of different departments and take all the cost-related records in a financial year.
Analyzing all the costs of different departments and working in sync with the other cost accountants in the team.
Getting access to the total value of the inventories and noting down the worth.
Work as a team to clear the month-end close and record all the cost-related information in the database.
Observing the inventory of an organization at the end of a financial year and recording it correctly.
Each business needs to confront fierce opposition under vulnerability conditions or circumstances. In addition, hazards implied in running of a specialty unit are likewise expanded because of speedy changes made in a friendly, political and monetary climate. These progressions make both positive and troublesome effects on the business. In this manner, every specialty unit ought to change or change its arrangements based on the circumstance prerequisites. Thus, a cutting edge business turns out to be increasingly more mind boggling in nature.
In former times, the size of the specialty unit was tiny and no sharp contest. Subsequently, there is no need for change in business strategies because of changes made in the friendly, affordable and world of politics. Also, the finance manager has close contact with every one of the representatives, providers and clients. Thus, he knows it all.
In any case, these days, the business is large in size and complex in character and is working under merciless competition. Hence, the money manager requires all sorts of data exhaustively to get ready proper business strategy. Just based on itemized data, a financial specialist can make quality choices and achieve success.
The customary monetary book-keeping neglects to outfit a wide range of data that are fundamental for successful working of business. Consequently, another bookkeeping framework arose and was created for example Cost Accounting as a part of Financial Accounting. This part of bookkeeping has been quickly extended with its creating strategies and methods in the field of its application.
Just monetary outcomes and monetary place of a business for a given timeframe and on the last date of such a given period separately are given by the Financial Accounting System.
A financial specialist can't be ready to control and direct the business adequately with the assistance of such data. Henceforth, the Cost Accounting assumes the liability of producing the data that are profoundly helpful for controlling the tasks with the end goal of expanding productivity and decreasing the costs and subsequently incrementing benefit.
Cost Accounting standards were found in application as soon as the fourteenth century. Simultaneously, the current expense bookkeeping technique was set up toward the end of the nineteenth century. Be that as it may, the expense bookkeeping standards got significant and grew not long before the finish of the Second World War. Logical Management gives a premise to the advancement of standard costing.
Targets of Cost Accounting
The following are the targets of cost bookkeeping.
1. Knowing about Cost
The primary reason for cost bookkeeping is investigating the costs with the end goal of knowing about the cost of the unit of result, of a task, of an interaction or of an activity. It includes the designation of consumption.
2. Practice Control over Cost
Principles are set and real are contrasted and guidelines. Assuming that there are any distinctions which must be brought before the administration for appropriate activity. The expenses of various periods are gathered with the end goal of cost control.
3. Forming Policies
Cost Accounting records supply essential and sufficient data to the administration with the goal that the administration can outline sound strategies on promoting, money, faculty and so forth.
For instance, how much expanded benefit by presenting another item is delineated with the assistance of cost data.
4. Fixing the Selling Price
A selling cost can't be fixed without knowing the all out cost of the predetermined item. The selling cost is fixed by adding a specific sum or level of benefit to the cost. Accordingly, the costing records supply the data like absolute expense, fixed expense and variable expense. This data is important for fixing the selling cost.
5. Augment Output and Profit
By utilizing the expense bookkeeping procedures, the administration can build the degree of result and benefit moreover. The expense bookkeeping records might call attention to the flimsy parts of an association. In this way, the administration can make a proper move to build the result and benefit.
6. Cost Negotiation
The fundamental businesses might need to deal with issues of value exchange with the public authority specialists. The Cost Accounting System gives a premise to such an exchange.
7. Gauging
The administration can gauge the money position on a specific date with the assistance of a money financial plan. Moreover, it is plausible to anticipate expanded or changes in benefit with the assistance of changes in the business blend or item blend.
8. Arranging of Capital Expenditure and Capital Structure
The expense bookkeeping information connected with working expense, cost conduct at various degrees of exercises, speed of turnover, working capital necessities and such are exceptionally valuable for legitimate preparation of capital consumption and capital construction.
9. Confronting Depression
Cost decrease and cost control are essential during the discouragement period. The explanation is that the selling cost ought to be the most minimal. If not thus, the business can't make due.
The least selling cost is fixed by diminishing the essential costs, keeping away from superfluous costs, choosing new item or item blend, looking through new deals regions, outlining new deals strategy, making cost cognizance, lessen the wastage, redirecting to new line of exercises and such. Thus, an association might confront the downturn for compelling work.
10. Wanting to Close Down
The last advance of an association is to close down the office. A Cost Accountant might suggest closing down a division in the wake of concentrating on the patterns of different conditions well ahead of time with the goal that much capital isn't lost due to late shutting down.
11. Assists with taking Make or Buy Decision
The expense bookkeeping records supply the data connecting with the costs brought about to make an item. The expense of such an item is contrasted with the rate at which a similar item is accessible in the open market.
On the off chance that the market rate is low, the Cost Accountant suggests purchasing the item in the open market. If not thus, a similar item might be produced. Thus, the expense bookkeeping assists the administration with taking a choice of making or purchasing a predefined item.
Elements of Cost Accounting
A concise clarification of the elements of cost bookkeeping is introduced underneath.
1. Accounting
Accounting includes recording of cost by set up or foreordained order.
2. Cost Control
The expense control is practiced through cost assortment, cost investigation, cost show and cost translation.
3. Cost Analysis
Cost Analysis manages assurance of various connections among costs and different determinants of expenses.
4. Cost Comparison
The expense of elective items, exercises, strategies or regions is looked at in the field of creation or circulation.
5. Cost Planning
Cost arranging includes the bookkeeping of all expenses in the records in an appropriate way.
6. Cost Finding
Cost finding is the estimation or assessment of various items, offices or different fragments of the organization's activities.
FAQs on Cost Accounting: Scope and Functions
1. What is the primary scope of cost accounting for a business?
The primary scope of cost accounting encompasses several key areas. It begins with cost ascertainment, which is the process of determining the cost of products, services, or operations. It also includes cost control, where it provides reports to management to identify areas where costs can be managed without affecting production. Finally, it serves a crucial theoretical need by providing organised data that aids in strategic decision-making for the entire organisation.
2. What are the main functions of a cost accounting system?
A cost accounting system performs several vital functions within a business. The key functions include:
- Cost Finding: Estimating the costs of different products, departments, or company operations.
- Cost Planning: Accounting for all costs in a systematic manner to facilitate budgeting and forecasting.
- Cost Analysis: Determining the relationship between costs and their various determinants.
- Cost Comparison: Comparing the costs of alternative products, methods, or activities to make informed choices.
- Cost Control: Exercising control through cost collection, analysis, presentation, and interpretation.
3. What are the key objectives of implementing cost accounting?
The main objectives of cost accounting are to enhance business efficiency and profitability. Key objectives include:
- Ascertainment of Cost: To calculate the cost per unit of a product, job, or process.
- Control over Cost: To set standards, compare actual performance, and take corrective action.
- Fixing the Selling Price: To provide detailed cost data (total, fixed, and variable) needed to set a profitable selling price.
- Policy Formulation: To supply management with sufficient information to frame sound policies regarding marketing, finance, and personnel.
- Maximising Profit: To identify and rectify weak areas in the organisation to improve output and profit.
4. How does cost accounting specifically aid in managerial decision-making?
Cost accounting is fundamental to managerial decision-making by providing detailed, relevant financial data. It helps management in making strategic choices such as whether to make or buy a component, whether to accept a special order at a lower price, or whether to discontinue a product line that is no longer profitable. By analysing cost behaviour, managers can also prepare accurate budgets, forecast future earnings, and plan for capital expenditures, ensuring the business operates efficiently and achieves its goals.
5. What is the practical difference between cost control and cost reduction in cost accounting?
While both aim to improve profitability, cost control and cost reduction are different concepts. Cost control focuses on adhering to predetermined standards and budgets. It is a preventive function that ensures actual costs do not exceed the set targets. In contrast, cost reduction is a corrective function that seeks to achieve a real and permanent decrease in the unit cost of products or services without compromising their quality or function. It challenges existing standards and continuously seeks more efficient methods.
6. What are the primary responsibilities of a cost accountant in an organisation?
A cost accountant has several crucial responsibilities. Their primary duties include establishing and maintaining the cost accounting system, analysing the costs of different departments and products, and assisting in the valuation of inventory. They are also responsible for preparing cost reports for the management team, participating in the month-end close process, and providing data-driven insights to support strategic decisions like budgeting and pricing.
7. In what real-world scenarios is a 'make or buy' decision, guided by cost accounting, crucial for a company?
A 'make or buy' decision is crucial in manufacturing industries where a company must decide whether to produce a component in-house or purchase it from an external supplier. For example, an automobile manufacturer might use cost accounting to compare the cost of manufacturing its own engines (including materials, labour, and overheads) against the price quoted by a specialised engine supplier. The decision is vital as it impacts capital expenditure, production capacity, product quality, and overall profitability.
8. Why is cost ascertainment considered a fundamental aspect of cost accounting?
Cost ascertainment is considered fundamental because it is the foundational step upon which all other functions of cost accounting depend. Without accurately determining the cost of a product, service, or process, a business cannot perform other essential activities. It is impossible to control costs without knowing what they are, to fix a selling price without understanding the total cost base, or to make informed managerial decisions without reliable cost data. Therefore, accurate cost ascertainment is the starting point for effective financial management and strategic planning.
