NATURE OF COST ACCOUNTING

The nature of cost accounting can be defined as under :-

1. Cost accounting is a special branch of accounting having
its own specific significance based on double entry
system.
2. It ascertain cost of products and services, through the
process of accumulation, classification, analysis and
recording. The elements of cost include (a) Material (b)
labour and (c) expenses. The main function of this system
is determine total cost and cost per unit.
3. It detemines the cost of incomplete work or job in case if
the work remains uncompleted.
4. This system provides measures for control and guidance
for various levels of management.
 SCOPE OF COST ACCOUNTING

The scope of cost accounting is very broad. In brief,

it help the management in following ways:
1. Analysing the profitability of product, service,
job or activities.
2. Analysis of profitability of various departments
of segments of the organisation.
3. Analysis of the type and nature of cost.
4. Explanation of the causes of variances between
actual cost and standard cost.
5. Helpful in determination of selling price.
6. Analysis of the change in profit as per the
change in level of production.
7. Analysis of the profit or loss of the

organisation.
8. Assist in management information system.

9. Provides basis for the application of

techniques of management accounting.

10. Helpful for manufacturing and service

rendering organisation.
 OBJECTIVES OF COST ACCOUNTING
1. 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.
2. Cost control : Cost control is reducing the cost of
production by controlling the wastage of material,lobour
and other expenses. Cost control helps to improve the
efficiency of organisation as a whole. Globalisation and
competition have made cost control area very crucial for
managerial performance.
3. Control on wastage : Cost accounting can explain the
source of wastage in the elements of cost (i.e
material,lobour and other expenses) and thus can save the
national factors of production.
4. 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.
5. Ascertainment of profitability : Profitability means capacity
to earn profits of a departments, section, product, job or
a process or service. The expected profits are compared
with actual profits to know the reasons of difference if
there is any. This helps to analysis the efficiency of each
segment of the organisation as well as for thr whole of
organisation.
6. 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 policies to be followed. For example : (a) to
introduce a new product (b) replacement of old machinery
with the new model.
7. Inter firm comparision : Cost accounting helps in making
comparisions of cost or of profits of one firm with
other firm operating in the same industry. For the
inter-firm comparision there should be the application
of uniform costing system within that industry.
8. Minimum capital in stocks : Cost accounting through
various techiques 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 and finished
goods.
9. 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.
ADVANTAGES OF COST ACCOUNTING

 Advantage to Management
(Employer).
 Advantage to Employees.
 Advantage to Society.
 Advantage to the Nation.
 ADVANTAGES TO MANAGEMENT

1. Indetification of Profitability and

unprofitable Activities of the Organisation.
2. Calculation of Quatation Price or Tender
Price.
3. Helps in Formulating Business Policies.
4. Helps the Management in decision making.
5. It Helps in making comparision.
6. Helps in Controlling Cost of Production.
7. Helps in Checking Material Cost.
 ADVANTAGES TO EMPLOYEES
1. Better Wages.
2. Distinction between Efficient an
Inefficient Worker.
3. Higher Standards of Living.
4. Social Recognition of the Workers.
5. Low Labour Turnover.
6. Elimination of strikes, lockouts and
dispute.
7. More Bargaining Power of the
Employees.
 ADVANTAGES TO SOCIETY
Society is benefited to a large extent by the
application of cost accounting system in the
factory through better quality products are made
available to the customer at the lowest price.
Workers of the factory are the part of the
society ant happy workers make the society more
happy. Better wages or the sharing of the profits
with the employees results in the uplift of the
society as the whole. More profits make creditors,
bankers, income tax department and trade union
to believe in the financial strength of the
organisation
 ADVANTAGES TO NATION
Better use of the available factors of production
makes the nation economically powerful and
progressive. Control on wastage generates more
output. Satisfied worker with a higher standards
of living and a happy society are great, human
resources of the nation. Low cost of production of
goods and services can help to increase exports
thus earning foreign exchange for the nation. This
foreign exchange can further be used for
providing better infrastructure to the nation.
 LIMITATION OF COST ACCOUNTING

1. Cost System is Highly Expensive : When an

organisation introduces costing system various
performs – stationery, forms, reports are to be
prepared which involve heavy expenses. Again a very
heavy expenditure is also to be incurred on the
establishment of costing department and its
operations which ultimately increases the cost of
production.
2. Cost system is Unnecessary : As the world over
every type of business or industry is not maintaining
cost accounts. Rather without cost accounts they are
running smoothly. So where is the need to burden the
organisation with one more department and extra
accounting works.
3. The Result of Cost System are not Trustworthy :
The argument is that as the cost depends upon
predetermined rates of standards are used with so
many assumptions which may not take place in reality.
Hence, cost accounting are not true and trustworthy.
4. An accounting system of so many forms and
performas: To record the purchase, storing and issue
of material, to record the arrival, departure and
working during the day, for each job, section, division,
cost center and products, various performas, forms
documents and reports are to be prepared and
presented for cost control and cost calculation.
5. Inapplicability of Costing System in so Many Cases:
The argument is that the system of cost accounting
cannot be applied effectively in so many types of
businesses and specially in small business and trading
business.