Cost Accounting helps management know how much it costs to produce goods or provide services, and where costs can be controlled. It supports pricing, budgeting, planning and decision-making. This topic explains the meaning, objectives, scope and common cost terms used throughout the subject.
Cost accounting covers:
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Cost accounting and financial accounting differ in the following ways:
Any three objectives of cost accounting are:
Cost accounting is a form of managerial accounting that aims to capture a company's total cost of production by assessing the variable costs of each step of production as well as fixed costs, such as a lease expense.
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Cost Accounting helps management know how much it costs to produce goods or provide services, and where costs can be controlled. It supports pricing, budgeting, planning and decision-making. This topic explains the meaning, objectives, scope and common cost terms used throughout the subject.
Cost accounting covers:
A cost sheet is a statement showing the total cost of production and cost per unit by classifying costs into materials, labour and overheads and then adding profit (for selling price).
Case: A factory’s profit is falling though sales are stable. Management suspects wastage in material and rising overheads. Cost accounting use: prepare cost sheet, compare with standards, identify material wastage and overhead absorption issues, and take control actions.
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The scope of cost accounting is wide because it covers the complete flow of cost information—from collection of cost data to reporting for control and decision-making. It generally includes:
Cost classification and recording: Developing procedures to record and classify costs into materials, labour and overheads, and further into direct/indirect, fixed/variable, etc.
Cost ascertainment and costing methods: Using suitable methods such as job costing, batch costing, process costing and service costing to determine total cost and unit cost.
Cost sheets and statements: Preparing cost sheets to show prime cost, works cost, cost of production and cost of sales for analysis and pricing.
Overhead accounting: Collection, allocation/apportionment and absorption of overheads, including treatment of under/over absorption.
Cost control and cost reduction: Establishing standards/budgets, analysing variances and preparing control reports to reduce wastage and improve efficiency.
Decision support: Providing relevant cost information for decisions like pricing, make-or-buy, shutdown, and product mix.
Thus, cost accounting supports planning, controlling and decision-making throughout the organisation.
