Everything you need to know about the Objectives of Cost Accounting. Some of the most important objectives of Cost Accounting are as follows: –
- To Ascertain Cost
- Cost Control
- Determination of Selling Price
- Ascertainment of Profitability
- Provides a Base for Setting Business Policies:
- Inter-Firm Comparison
- Control on Wastage
- Minimum Capital in Stocks
- Effective Information System
- Internal Audit System
- Measuring and Increasing Efficiency
- Cost Reduction
- Cost Management
- Providing Basis for Managerial Decision-Making:
- Cost finding
- Cost recording
- Cost analysis
- Cost reporting
Everything you need to know about the Objectives of Cost Accounting
12 Basic Objectives of Cost Accounting
The basic objectives of cost accounting are:
1. To provide unit product cost for inventory valuation and income measurement.
2. To ascertain cost of production of every unit, job, operation, process, department or service, and to develop cost standards.
3. 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.
4. To reveal the source of economies after taking into account design of products and methods of production, type of equipment, irate of output, and layout of activities.
5. 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. The objective may again be to change the method of production or production or incidence of cost in order to render such activities more profitable.
6. To provide actual figures of cost for comparison with estimates and to assist the management in their price fixing policy.
7. To present comparative cost data for different periods and different volumes of production and thereby assist the management in budgetary control.
8. To record and report to the concerned manager how actual costs compare with standard costs and possible causes of difference between them.
9. To indicate the exact cause of increase or decrease in profit or loss as shown by the financial accounts.
10. To provide data for comparison of costs within the firm and also between similar firms.
11. To show the effect on profitability when a factory is not producing to full capacity.
12. To provide cost data for management’s decisions in evaluating alternative courses of action. Adding or dropping a product line, making or buying a component part, replacing old equipment, and accepting or rejecting an order are some of the specific decisions for which cost accountant provides useful information.
What are the Objectives of Cost Accounting?
The main objectives of cost accounting may be:
(i) To Ascertain Cost:
With the help of cost accounting cost per unit of a product, job or process is calculated. For calculating cost of the product or service various methods like unit costing, contract costing, job costing etc. are applied. The technique of ascertaining cost is known as costing.
(ii) Cost Control:
Cost control is reducing the cost of production by controlling the wastage of material, labour and other expenses. Cost control helps to improve the efficiency of organisation as a whole. For cost control budgetary control, standard costing and responsibility accounting are the main tools applied by the management.
Globalisation and competition have made cost control area very crucial for managerial performance.
(iii) Determination of Selling Price:
Cost accounting has the main object to help in fixation of selling price of the product or service not only in normal condition but also under various stressing market conditions. To fix the selling price various factors like cost of production, market situation, business cycle, govt. policies, competition, change in fashion, income level of the people do play their role.
Cost accounts helps to provide necessary information to take decisions under special conditions, like, depression, export, or exploring the new market, etc. Minimum selling price can be decided with the availability of proper cost data.
(iv) Ascertainment of Profitability:
Profitability means capacity to earn profits of a department, section, product, job or a process or service. This capacity can be judged with the help of cost data provided by cost accounting. The expected profits are compared with the actual profits to know the reasons of difference if there is any.
This helps to analyse the efficiency of each segment of the organisation as well as for the whole of the organisation. Before introduction of a new product, design method, machine, or operating market profitability analysis helps to set the targets and performance measurement.
Thus, the object of the cost accounting is to measure the profitability of the activities carried out or planned. Profit making capacity should be established.
(v) Provides a Base for Setting Business Policies:
Cost accounting helps to provide accurate cost information. These cost data help the management in taking short term and long term business policies to be followed.
Cost accounts help in various decision making processes which may be very crucial to the organisation like:
(a) To introduce a new product or new method of production or to explore a new market.
(b) How to use the idle capacity if there remains any?
(c) Deciding the sales-mix to maximise the profits or to maximise the use of available factors of production.
(d) Make or buy decision regarding a product.
(e) Exporting goods in a foreign market even at below the cost of production or not.
(f) Closing down the plant or to continue production even in losses.
(g) Replacement of old machinery with the new model or not.
(vi) Inter-Firm Comparison:
Cost accounting helps in making comparisons of cost or of profits of one firm with another firm operating in the same industry. For the inter-firm comparison there should be the application of uniform costing system within that industry.
(vii) Control on Wastage:
Cost accounting can explain the source of wastage in the elements of cost (i.e. material, labour and other expenses) and thus can save the national factors of production.
(viii) Minimum Capital in Stocks:
Cost accounting through various techniques like various levels of stock, analysis of slow moving material, continuous stock taking can decide the objective to minimise the investment of capital in stocks of raw material, work in progress or finished goods.
(ix) Effective Information System:
The objective of cost accounting is to prepare regular reports regarding material, labour and other expenses and to communicate those reports at the effective level of management to make them effective.
(x) Internal Audit System:
The objective of cost accounting is to develop internal audit system which may help in effective working of different departments of the organisation.
7 Main Objectives of Cost Accounting: Ascertaining Costs, Determining Selling Price, Measuring and Increasing Efficiency, Cost Control and Cost Reduction, Cost Management, Ascertaining Profits, and Providing Basis for Managerial Decision-Making
Cost accounting serves a number of purposes.
The following are considered to be most important objectives:
1. Ascertaining Costs:
The first and foremost objective of cost accounting is to find out the cost of a product, process or service. The other objectives which have been mentioned hereafter can be achieved only when the costs have been ascertained.
2. Determining Selling Price:
After ascertaining the cost of product, add a certain percentage of profit to cost to determine selling price. Thus necessary that the revenue should be greater than the costs incurred in producing goods and services from which the revenue is to be derived. Cost accounting provides information regarding the cost to make and sell such products or services.
3. Measuring and Increasing Efficiency:
Cost accounting involves a study of the various operations used in manufacturing a product or providing a services. The study facilitates measuring of the efficiency of the organization as a whole as well as of the departments besides devising means of increasing the efficiency.
4. Cost Control and Cost Reduction:
Cost accounting assists in cost control. It uses techniques such as budgetary control, standard costing etc. for controlling costs. Budgets are prepared well in advance. The standards for each item of cost are determined, the actual costs are compared with the standard costs and variances are found out as to their causes.
This greatly increases the operating efficiency of the enterprise. Besides it, cost is required to be reduced also constant research and development activities help in reduction of costs without compromising with the quality of goods or services.
5. Cost Management:
The term ‘Cost Management’ includes the activities of managers in short-run and long-run planning and control of costs. Cost management has a broad focus. It includes both cost control and cost reduction.
As a matter of fact cost management is often invariably linked with revenue and profit planning. For instance, to enhance revenue and profits, the management often deliberately incurs additional costs for advertising and product modifications.
6. Ascertaining Profits:
Cost accounting also aims at ascertaining the profits of each and every activity. It produces statements at such intervals as the management may require. The financial statements prepared under financial accounting, generally once a year or half – year, are spaced too far apart in time to meet the needs of the management.
In order to operate the business at a high level of efficiency, it is essential for the management to have a frequent review of production, sales and operating results. Cost accounting provides daily, weekly or monthly volumes of units produced, accumulated costs together with appropriate analysis so that quantum of profit and profitability is known.
7. Providing Basis for Managerial Decision-Making:
Costs accounting helps the management in formulation operative policies.
These policies may relate to any of the following matters:
(i) Determination of cost-volume-profit relationship.
(ii) Shutting down or operating decision.
(iii) Make or buy decision.
(iv) Continuing with the existing plant and machinery or replacing them by improved and economical means.
Explain the Objectives of Cost Accounting – Cost Finding, Cost Calculating, Cost Analysis and More…
The object of cost accounting may be taken as – cost finding, cost calculating, cost analysis and cost reporting for cost reduction, cost saving, cost control, managerial decision and policy making.
The objectives may be explained in detail as under:
(a) To determine the actual cost of each article, process, operation, service, department or segment of activity.
(b) To reveal and report inefficiencies in the form of material wastage, loss of time in material buying, storing, and issuing.
(c) To provide actual figures of cost comparison with estimates of costs and price fixing.
(d) To find out the degree of efficiency and productive capacity of men and machines and ideal standard for their working.
(e) To implement incentive wage plans for workers.
(f) To reduce cost through budgetary control and standard costing.
(g) To study trends at different volumes of output, and to determine production policies and
(h) To ensure continuous check and adjustment of stores and materials with the help of perpetual inventory.
(i) To organize internal audit system, and interlocking of financial and cost accounts to verify the accuracy of each other.
(j) To furnish necessary data for the preparation of profit and loss account and balance sheet at short intervals [e.g., monthly, quarterly, etc.,] for each department or business as a whole.
State the Objectives of Cost Accounting
It is correct to say that the cost accounting system is useful for the purpose of fixing sale prices.
But, there are various other important objectives which are discussed below-
1. Ascertainment of cost of production of every unit, job, operation, process, department or service.
The ascertainment of cost includes-
(a) Cost finding;
(b) Cost recording
(c) Cost analysis; and
(d) Cost reporting.
It may be done by using any one or more of the Costing principles, viz., historical costing (actual figures), standard costing, direct costing or absorption costing, marginal costing and uniform costing.
2. Determining the selling price.
3. Cost control by developing cost standards or budgets.
4. Ascertainment of profit of each activity, and
5. Assistance to management in its task of planning and decision-making.
6. The final objects of cost accounting are the cost control (control of material, labour and overheads), cost reduction and maximisation of profit by optimum use of material, men, machinery, money and management (5 ‘M’s).
Remedial action can be taken on analysis of the causes of inefficiencies. Cost reduction is always possible by means of cost control techniques as well as operations research and value analysis techniques. Cost comparison helps in cost control.
7. To determine the value of closing inventory.
8. Presentation of Cost data. The cost data is to be classified and presented to the management at the right time in a right form.
Top 6 Objectives of Cost Accounting
(i) To Ascertain and Analyse Costs
The primary objective of cost accounting is to ascertain and analyse costs incurred on the production of various products, jobs and services, etc.
(ii) To Control Costs
Cost accounting has developed various techniques such as standard costing and budgetary control for controlling costs.
(iii) To Fix the Selling Price
Cost accounting provides reliable data on the basis of which selling prices can be fixed.
(iv) To Reduce Costs
Of late, the objectives of cost accounting have been extended to reducing costs. Under the cost reduction plan, products, processes, organisation and methods are continuously scrutinized to improve efficiency and reduce costs.
Value analysis, time and motion study, standardisation, simplification, etc., are important techniques of cost reduction.
(v) To Prepare Periodic Statement
Under cost accounting system monthly or quarterly cost statements for periodic review of operating results are prepared.
(vi) To Provide Information
Cost accounting provides useful information for planning and control and for taking various decisions regarding increase in production, installation or replacement of a machine, making or buying of a component, continuing or closing down of a business, etc.
6 Key Objectives of Cost Accounting
The following are the objectives of cost accounting:
Objective # 1. Cost ascertainment:
The primary objective of cost accounting is to ascertain the cost per unit of different products produced or services rendered by the concern. The technique of ascertaining cost is known as costing. It ascertains the cost of each unit, process, job, department, etc.
The cost is ascertained with the help of following ways:
a) Historical costing:
In this method costs are ascertained after incurring of such costs. It records what has actually incurred for a particular thing or service. It is not much useful in cost accounts as it records the cost after they have been actually incurred and there remains no scope for control.
b) Standard costing:
In this method for each and every item a particular standard is set. It is analyzed with the actual cost after they have been incurred. If any variations occur, corrective steps will be initiated to avoid the variances.
c) Marginal costing:
It is the ascertainment of marginal cost by differentiating between the variable and fixed cost. Fixed cost remains same for a particular volume of output. The cost so incurred for producing one extra unit is called as marginal cost.
Objective # 2. Cost control:
The cost accounting classifies all the expenses into two categories viz., controllable expenses and uncontrollable expenses. The main aim of classification is to secure control over controllable variables. All the components of costs – material, labour and overhead are classified and due care is taken to controllable costs.
For every item standard is set. The actual costs are compared with the standard, if there are any variance, reported to the management for managerial decision, this holds good for all the elements of cost.
Apart from this, scientific study is conducted to control the wastage of materials. Plant and machineries are set up in such a way that the movement of machines and labour is also minimized in order to control the cost. All the cost figures of one year are compared with previous years and even with other company figures. This will help to know the trends of the company in the market.
Objective # 3. Cost reduction:
Cost reduction refers to the reduction of cost of a product or service without any compromise in the quality. The competition is very stiff in the market. In a competitive market survival is achieved through cost reduction only. The cost reduction is achieved through innovation in technology, machine layouts, designs of a product, etc., which will help the management to reduce the cost.
In cost accounting research and development activities are carried out routinely. It can be attained almost in all areas of business.
Objective # 4. Ascertainment of profitability:
The cost accounting always tries to ascertain the profitability of a particular project. All the costs are ascertained at each stage and recorded. On the basis of study it always ascertains the profitability of each product or process or project or even each activity. The profitability figures are compared with actual profit and deviation is reported to the management for corrective action.
Objective # 5. Determination of the price:
The price is fixed on the basis of total cost incurred and the margin of profit expected in different situations of supply and demand. The accounting gives full information about the cost of each item of an expenditure involved on the product.
The effect on profit by increase or decrease in the volume of output or selling can be calculated very easily with the help of marginal costing. So, it gives clear information to the management to fix a competitive price in the market taking into consideration demand and the supply.
Objective # 6. Report to the business decisions:
The cost accounting records each and every item in a systematic manner. It studies all the elements of cost and their behavior. It also uses various techniques to ascertain the cost and to analyze. It uses different methods to ascertain the cost in different industries.
All these give clear report to the management for taking policy decisions e.g., whether to purchase or produce, whether to increase the capacity or not, what is the unused capacity, impact of extra use etc.
Objectives of Cost Accounting – Ascertainment of Cost, Analysis of Cost, Decision Making Purpose and More…
Cost Accounting system is installed in an organization to serve certain purposes/objectives. The order of priorities in the objectives keeps on changing due to changing circumstances. In earlier times, the ascertainment of the cost was the primary objective but due to invasion of computers, calculation of cost has become an easy task and so it is pushed down in the ladder of priorities. The cost information for decision-making, has occupied a primary place in these days.
Following are the important objectives:
(a) Ascertainment of Cost:
The cost information is the basis for the determination of the price of product or service. Therefore, it is necessary to calculate the cost of a product or service. The cost is calculated by aggregating expenses subject to certain concepts and convention. According to the nature of the product a relevant method is followed for this purpose.
(b) Analysis of Cost:
Total cost is broken down into several constituent parts, according to some basis. For example, total cost can be divided according to elements as material, labour and expenses. The detailed information about these parts helps to know the significance of each in the total cost.
(c) Control of Cost:
Scientific judgement as to what should be the cost, helps to have an effective control over the expenses to be incurred. In other words, the objective of Cost Accounting is to channelize the resources into the most optimum and efficient use. For example, a wastage report generated from the system helps to know whether the quantity loss is within the limit or not.
(d) Reduction of Cost:
Reduction of cost refers to the permanent reduction in the cost of a product or service without impairing the quality and without affecting the purpose for which it is intended to be used. Due to an intense competition in the market, the management has little scope to vary the sales price.
In such a situation, it becomes necessary to look into the activities that reduce the cost component. For example, innovative way of performing an activity, substituting with alternative parts.
(e) Cost for Managerial Decision-making Purpose:
Decision-making is a very significant process in the top level management activities. Cost Accounting should generate vital cost information which helps to take decision. Cost Accounting is designed to suit this need.
Correct decisions at right times help to achieve the organizational goals. Some of the decision areas are: to make or buy, to continue or discontinue a product, to export at the offered price or not, utilization of the capacity, optimum product mix, etc.
Tremendous changes have taken place in the field of production technology, information technology, competitive environment, government policies etc. Accordingly cost accounting should gear up to meet the challenges of change and in the process. the objectives have to be reset according to the revised preferences.
Objectives of Cost Accounting
Objective # 1. Aids in fixing the prices of products:
Cost Accounting helps in the determination of the cost of the product after which the profit margin is added by the manufacturer and the selling price of the product is fixed.
Objective # 2. Helps in taking proper decisions:
Taking the decision in respect of the price of the product is very important for which the comparison of actual and standard cost must be done so as to analyse the causes of variation and take the correct decision.
Objective # 3. Disclosure and minimising wastage:
It helps in locating the different sources of wastage in various operations of manufacture like spoilage, leakage, pilferage, inadequate utilisation of plant etc. By appropriate control measures, these wastages can be avoided or minimised.
Objective # 4. Economising the cost:
It helps the management to economise the cost effectively.
Objective # 5. Effective control system:
It provides effective control on the costs, time and efforts of labour, machines and other factors of production.
Objective # 6. Ascertainment of cost:
There are two methods of ascertaining costs, viz., Post Costing and Continuous Costing. Post Costing means analysis of actual information as recorded in financial books. Continuous Costing aims at collecting information about cost as and when the activity takes place so that as soon as a job is completed the cost of completion would be known.
Cost Accounting is very important for ascertaining the cost.
Objective # 7. Cost control and cost reduction:
Cost Reduction, may be defined as “the achievement of real and permanent reduction in the unit cost of goods manufactured or services rendered , without impairing their suitability for the use intended or diminution in the quality of the product.”
Cost reduction should not be confused with Cost control. Cost saving could be a temporary affair and may be at the cost of quality. Cost Control and reduction can be done with the help of Cost Accounting
Objective # 8. Ascertaining the profit:
Cost Accounting helps in ascertaining the profit of any activity ascertained by matching cost with the revenue of that activity. The purpose under this step is to determine costing profit or loss of any activity on an objective basis.