Cost Accounting and Its Objectives

Cost accounting was born to fulfill the needs of management of manufacturing companies
for a detailed information about the cost. Cost accounting is a mechanism of accounting by means
of which costs of services or products are ascertained and controlled in a manufacturing firm for
different purposes. The managerial skill and abilities can be improved. The object of cost accounting
is to ascertain the true cost of every operation, through a close watch—cost analysis and allocation.

The main objectives or purposes are as follows:

1. Ascertainment of Cost:
It enables the management to ascertain the cost of product, job, contract, service or unit of
production so as to develop cost standard. Costs may be ascertained, under different circumstances,
using one or more types of costing principles— standard costing, marginal costing, uniform costing
etc.

2. Fixation of Selling Price:

Cost data is useful in the determination of selling price or quotations. Apart from cost
ascertainment, the cost accountant analyses the total Cost into fixed and variable costs. This will
help the management to fix the selling price; sometimes, below the total cost but above the variable
cost. This will increase the volume of sales—more sales than previously, thus leading to maximum
profit. The scientific way of reducing the prices is possible in an industry only where a sound costing
system exists. In other words, cost reduction, in the absence of a costing system, may cause to shut
down the industries.

3. Cost Control:
The object is to minimize the cost of manufacturing. Comparison of actual cost with standards
reveals the discrepancies—variances. If the variances are adverse, the management enters into
investigation so as to adopt corrective action immediately.

4. Matching Cost with Revenue:

The determination of profitability of each product, process, department etc. is the important
object of costing.

5. Special Cost Studies and Investigations:

It undertakes special cost studies and investigations and these are the basis for the
management in decision-making or policies. This will also include pricing of new products,
contraction or expansion programs, closing down or continuing a department, product mix, price
reduction in depression etc.

6. Preparation of Financial Statements, Profit and Loss Account, Balance Sheet:

To prepare these statements, the value of stock, work-in-progress, finished goods etc., are
essential; in the absence of the costing department, when we have to close the accounts it rather
takes too much time. But a good system of costing facilitates the preparation of the statements, as
the figures are easily available; they can be prepared monthly or even weekly.
Cost Accounting and Its Objectives
1. To ascertain cost of production of every unit, job, operation, process, department or service, and
to develop cost standards.
2. To indicate to the management any inefficiencies and the extent of various forms of waste,
whether of material, time, expense or in the use of machinery, equipment and tools. Analysis of the
causes of unsatisfactory results may indicate remedial action.
3. To reveal sources of economics after taking into account design of products and methods of
production, type of equipment, rate of output and layout of activities.
4. To disclose profitable and unprofitable activities so that steps can be taken to eliminate or reduce
those from which little or no profit is obtained or to change the method of production or incidence
of cost in order to render such activities more profitable.
5. To provide actual figures of cost for comparison with estimates and to assist the management in
their price-fixing policy.
6. To present comparative cost data for different periods and different volumes of production and
thereby assist the management in budgetary control.
7. To record and report to the concerned manager how actual costs compare with standard costs
and possible causes of differences (variances) between them.
8. To indicate the exact cause of increase or decrease in profit or loss shown by the financial
accounts.
9. To provide data for comparison of costs within the firm and also between similar firms.
10. To show the effect on profitability when a factory is not producing to full capacity.
11. To supply suitable cost data for managerial decision-making as regards expansion and
contraction of activities, making or buying of components, determining the break-even point,
dropping a product line, selecting the optimal sales-mix, shutting down of existing operations, etc.
1 – Cost Allocation
The primary purpose of cost accounting is to allocate all the expenses incurred to the
respective product and bifurcate the cost individually as and for incurred.
2 – Per Unit Cost of Different Types of Product
Various entities produce many types of products within a factory, and purchasing the
required product is common for all the products. Then by correctly analyzing all the costs for the
respective products, one can quickly determine the per-unit cost of production for different
products.
3 – To Examine the Costs
Sometimes, the management wants to decide whether to produce the product in-house or
outsource the same. For making such a decision, management has to thoroughly examine the costs
associated with the production of the product in-house. After that, choose wisely by comparing the
same from the outsourcing proposal.
4 – For Fixation of Appropriate Per-Unit Price of the Product
By correctly allocating all the expenses incurred, one can easily judge the cost of producing
or manufacturing the product and the number of units produced. It serves a useful purpose to the
management for deciding the per unit selling price of the product to be charged from the purchaser
as per market demand and supplies and keeping in view the availability of the substitute.
5 – For Analysing the Results from the Different Products
One can quickly determine the production results of every product, such as the cost incurred
on procurement of material, labor, overheads, etc., for each respective product or department-wise.
6 – To Prepare Budgets
Every organization plans its fund utilization and prepares a budget for the production of each
product, which needs the analysis of past costs and future requirements, which can easily be seen
from the maintained cost records.
7 – To Comply with the Legal Requirements as laid upon by the Government
Various legal implications were also laid upon the enterprise to maintain and prepare such
records as required by the law on a timely basis and in such a manner as prescribed under law. So,
for some enterprises, maintaining cost records is also compulsory.
8 – To Check the Cost Allocations
When all of the expenses are incurred regarding the production process, it helps senior
account reconcilers to check whether the proper allocation of all the expenses is done or not.
9 – Timely Information to Management as and When Required
Sometimes, the budgeted plans are in variance with actual expenses incurred for producing
the product. Thus, correctly maintained cost records help the management decide where cost-
cutting may be done or should be done.
10 – Helps Management in Decision Making
As discussed above, timely analysis of the maintained cost account helps management make
wise decisions regarding future events to have occurred.
11 – Helps Management in Taking Decisions about Cost Reductions
It is seen that there may be a variance of costs incurred from the budgets prepared with the
actual amount incurred. It may sometimes also be because of the government policies and other
factors; for instance, suppose we have a manufacturing plant in a remote area. Due to the weather
problem, there is an unavailability of raw material to be used in production. If the same could not
be made available for the next ten days, then the cost of labor and other overheads for such ten
days will result in extra costs not considered while preparing budgets.
12 – Helps Cost Auditor in Easily Analyzing the Data
As per the policies and regulations of the Government, such companies fulfill the criteria
required to maintain such records in a prescribed manner and get them audited by the person
authorized to do so in case of cost records cost auditor. When the cost records are to be audited,
then properly maintained accounts and allocation will positively affect the auditor’s mind regarding
the compliances made by the enterprise and convince such auditors to issue a favorable report of
accounts.
13 – Acts as a backup in Soft copy Instead of Hard Copy
When records are maintained properly, it helps the management easily check the records
maintained as and when required from any remote location. In addition, it serves as a backup of all
the physical records maintained in digital form and can be easily kept over the years.
14 – Helps in Finalization of Financial Statements
At the time of preparation of financial statements, the properly maintained accounts help
the financial analysts easily understand the costs and expenses that an enterprise incurred over
some time and could also save time.
15 – Act as Base for Formulating Policies
By analyzing the properly maintained cost accounts, the management and the decision-
making team can easily judge the pros and cons of the decisions considered and taken shortly
regarding the business’s activities and day-to-day operations. Furthermore, as proper accounting is
done by analysis, one could easily formulate the policies laid upon or adhered to.