Objectives/purposes/functions/aims of cost accounting

Main objectives or purposes or functions or aims of cost accounting are:

  1. Cost finding or cost ascertainment
  2. Control of cost
  3. Reduction of cost
  4. Fixation of selling price
  5. Providing information for framing business policy

Cost finding or cost ascertainment : 

       The primary objective of cost accounting is ascertainment of cost. It is done through the methods and techniques of costing. Costing is the process of collection, classification and analysis of costs or expenses.

Control of cost :

               A basic function of cost accounting is to control costs. In order to know the efficiency of the organisation and its various departments and cost centres, budgets and standards are fixed for materials, labour and overheads which are compared with the actual performances. The variances disclose whether or not costs are under control. Remedial actions are taken to control the costs which are not within the budgets or standards set.

Reduction of cost:

Reduction in cost should be understood as attaining “real and permanent” reduction in unit costs of produced goods or services rendered without affecting their suitability for the expected use. Cost accounting is helpful to management in cost reduction through the techniques of budgetary control, standard costing, material control, labour control and overheads control.

Fixation of selling cost:

 The price of a product consists of total cost and the margin required.Cost accounts provide detailed cost information in the form of different components. They also provide information in terms of fixed cost and variable cost, so that the extent of price reduction to be done in case of intensive competition, etc., can be decided.

Framing business policy:

        Cost accounting strives to help the management in formulating business policy and decision making. Break even analysis, cost-volume-profit relationships, differential costing, etc., are helpful to the management in taking decisions regarding:

  • Production or discontinuation of a product;
  • Utilisation of idle capacity;
  • The most profitable sales mix;
  • Alternatives based on key-factor;
  • Export decisions;
  • Make or buy decisions, etc.

Advantages of cost accounting

Deficiencies in financial accounting are compensated by cost accounting. It is immensely useful to the management, to the employees, to the public and to the creditors. The advantages it offers to all the “stake-holders” are discussed below:

The above advantages are briefly explained below:

1.To the management

  • Effective decision making: Cost accounting provides information regarding individual products, departments, divisions, and cost centres. This facilities the management to identify unprofitable operations and improve overall profitability.
  • Measuring efficiency: With the help of cost accounting, the management can set budgets and standards for various elements of cost and compare them with actuals to measure efficiency.
  • Cost reduction: Cost accounting is helpful to management in reduction of cost through its techniques by its efficient and effective utilisation of raw materials, labour and optimum production of output.
  • Fixation of selling price: Cost accounting provides information under various classifications. One of them is on the basis of behaviour of costs. Availability of information in detail regarding  variable and fixed costs helps in fixing selling price under different circumstances.
  • Effective cost control: The fundamental objective of cost accounting is to ascertain and control costs. The segregation of cost at different stages is helpful in effective control through standard costing and budgetary control.
  • Increased efficiency: Under an efficient cost accounting system, proper inventory control, labour utilisation and proper analysis of expenditure is possible. This results in increased efficiency throughout the organisation.
  • Effective inventory control: An efficient cost accounting system helps in effective inventory control through techniques like ABC analysis , Stock verification, VED analysis and levels of stock.
  • Reduction of wastages of material and labour: Cost accounting sets predetermined costs for different elements which are compared with actuals to reveal variances. The unfavourable variances are dealt with and controlled effectively. Moreover, standards indicate the norms beyond which cost is not to be exceeded. This acts as a check on wastages.
  • Effective utilisation of resources: Marginal costing helps in decision making regarding ‘make or buy’ of components , profit planning, export decisions, effective utilisation of key factor, sales mix, etc. Standard costing and budgetary control are also helpful in effective utilisation of resources.
  • Effective budgeting: Cost accounting emphasises and records both historical and costs and pre-determined costs, which are essential for the technique of budgetary control. Without additional effort, budgetary control can be operated when costing systems are used.

2. To the employees

  • Stability of tenure: A good costing system is helpful to managements in increasing productivity and profitability of firms. This leads to prosperity of industries, better wages for workers and security of job.
  • Fair wage policy and suitable incentive schemes: Since cost accounting system keeps records for each element of cost, labour hours and labour cost are recorded in full detail. This will be helpful for the management in introducing a good wage system to reward skilled workers and stimulate them to go for higher production.

3. To the creditors

  • Before the creditors offer loans to a firm, they can have better understanding of the progress and profitability of the firm through relevant reports. Estimates and budgets can project the future prospects of a firm.

4. To the government

  • Cost data of specific industries and general trend of costs can influence the government to initiate appropriate changes in granting of subsidies, formulating taxation policies, import and export legislation, etc.

5. To the public:

  • Good costing system helps in proper utilisation of resources. Cost reduction is helpful in fair prices of products and profitability of organisations is helpful in prosperity of the industry through more employment opportunities to the members of the public.

Leave a Reply

Your email address will not be published. Required fields are marked *