Function of cost accounting
Functions of Cost Accounting
In order to achieve its objectives, cost accounting performs the following functions-
(1) Determination and analysis of cost-The main function of cost accounting is to find out the total cost and unit cost of manufactured goods and services, contracts.processes etc. and to classify and analyse costs in such a manner as to enable a comparative study of costs. For a
comparative study, comparison is made between the results of the previous period with those of the present and a
comparison with standard cost helps to find out the variances.
(2)Cost Control- Another function of cost accounts is to control costs. The data made available through cost accounting helps in minimizing costs and also helps the firm to achieve maximum production at the least possible cost. In order to reduce cost, control is exercised in purchase and issue of materials, worker are paid wages according to a proper method, there is proper division of work and direct and indirect expenditure are controlled. Effective control avoids wastage. All activities can be planned earlier on the basis of the budget, and standard cost enables analysis
of variances so that their causes can be known and remedial measures taken.
(3)Matching of Cost and Revenue- In order to find out profit or loss through cost accounting, cost accounts maintain the records of selling cost and the revenue earned in a systematic manner whenever the management has to take crucial divisions like sale of product, plant installation, closure of departments etc., the relevant and adequate data is available in a systematic manner through cost accounts.
(4) Provides information for management decisions-Cost accounting generates vital cost information which helps decision-making and formulation of business policy.
(5) Price fixation and future policy.
Determination Advantages or Merits
and Significance of Cost Accounting
Advantages to Producers and
(1) Knowledge of Profitable and Non-Profitable Functions. By adopting the cost accounting system, the producers get acquainted with the fact as to which commodities being produced could lead to profits, and which others won’t be profitable or giving less of profit. In such a condition, the activities not leading to profits or resulting in less profits, shall be closed down and the activities capable of giving more profits could be increased.
(2) Best Use of Materials, Labour and Machinery- Under the cost accounting system, strict control is observed on the purchase of materials, keeping it in stores, and the process of its issue, so that the wastage of the materials is checked. The workers are provided with the work and given reasonable remuneration in accordance with their
abilities. Hence, there is reduction in the labour cost. In it,full attention is paid to the proper use and modernisation of the machinery. On the whole, there is an increase in the capacity of production.
(3)Analysis of Production Cost and Comparative Studies- Under the cost accounting system, by taking up complete analysis of the production costs of any commodity or the components of the cost, the same may be compared with the figures of the last years. Where the production costs increase enough effort is made possibly to reduce them.
4.Facility in Determining the Sales Price-When in the cost accounts, there is known the correct cost of any commodity, the sales price could easily be arrived at by adding the profit to the cost.
5.Knowledge of the Causes of Profit or Loss- If the profits are declining in the current-year or if the loss is being sustained from the cost accounts, we could get the knowledge correctly which helps in the smooth running of the business.
6) Helpful in Taking Important Decisions-There are various important decisions required to be taken up in
the business, for instance, whether the sale price be reduced or enhanced; whether the commodity be prepared or produced self or be brought from the market, whether the old
plant be replaced or not by the new one, whether the factory be taken on lease or be purchased freely; in all such decisions the marginal cost has the significant role which is method of cost accounting.
(7) Helpful in Determining the Production Policy-Which commodity or product be produced more or whose production be reduced, which of the new products be brought into the market, in which of the areas be the advertising taken more vigorously, etc., are such matters in which by
determining the costs and profits, the decisions could easily be taken. Thus, by cost accounting, there is also some help available in the determination of production policy.
II.Advantages to Workers and Employees
(1)Work to Labourers According to Ability-By adopting the cost accounting method, labourers might be provided with the work according to their ability and liking.
The work of every labourer is definite and the responsibility also certain. The standard or quantum of work to be done by every worker is also prescribed so that every employee would like to do better and efficient work from the prescribed standard. Thus, the efficiency of the workers is increased.
(2)Adequate Remuneration- In the cost accounts, the workers are divided between the efficient and inefficient, trained, etc. With the help of the cost accounts,the workers are encouraged to work more by payment of
adequate remuneration. This enhances their efficiency and even an inefficient worker is terhpted to become an efficient labourer.
(3)Advantages of the Incentive Methods- The cost accounts emphasise upon adopting the wage payment method on incentive basis which encourages the workers to
take up more work. It results in the increase of workers efficiency, income and productivity. In the cost accounting system, full attention is given to the workers’ leisure, recreation and labour welfare activities.
(4)Security Regarding the Employment-By the suitable method of cost accounting.
Disadvantages or Demerits oroty
Drawbacks of Cost Accounting
The various demerits of cost accounting could be studied under the following heads:
(1)aproach any need for recording them in the cost accounts ? Thus,It is not Essential- When the people’s is that when we account for all the events and transactions under the financial accounting, why does there arise
these critics hold that the cost accounts are unnecessary.
(2) It is Wasteful and Extravagant-Some of the scholars consider that the cost accounting system is very expen-
sive and thus, instead of reduction in the costs, the same are increased automatically. For the work of cost accounting, a separate section of cost accounting is to be organised; several statements, forms and registers are required to be maintained which increase the expenses of the Concern and ultimately the production cost of the commodity increase.
3.Results from Cost Accounts are Incorrect and Unreliable- Some of the critics also conceive that the results and the conclusions drawn from the cost accounts are based upon the estimated figures, hence they are not dependable or correct.
(4) Unsuitable for Some Industries- Some of the critics also hold that the cost accounting system is unsuitable for some industries.