Saturday, January 16, 2010

Objectives of Cost Accounting

Objectives of Cost Accounting

The main objectives of cost accounting can be summarized as follows:

1. Determining Selling Price

Business enterprises run on a profit-making basis. It is, thus, necessary that revenue should be greater than expenditure incurred in producing goods and services from which the revenue is to be derived. Cost accounting provides various information regarding the cost to make and sell such products or services. Of course, many other factors such as the condition of market, the area of distribution, the quantity which can be supplied etc. are also given due consideration by management before deciding upon the price but the cost plays a dominating role.

2. Determining and Controlling Efficiency

Cost accounting involves a study of various operations used in manufacturing a product or providing a service. The study facilitates measuring the efficiency of an organization as a whole or department-wise as well as devising means of increasing efficiency.

Cost accounting also uses a number of methods, e.g., budgetary control, standard costing etc. for controlling costs. Each item viz. materials, labor and expenses is budgeted at the commencement of a period and actual expenses incurred are compared with budget. This greatly increases the operating efficiency of an enterprise.

3. Facilitating Preparation of Financial and Other Statements

The third objective of cost accounting is to produce statements whenever is required by management. The financial statements are prepared under financial accounting generally once a year or half-year and are spaced too far with respect to time to meet the needs of management. In order to operate a business at a high level of efficiency, it is essential for management to have a frequent review of production, sales and operating results. Cost accounting provides daily, weekly or monthly volumes of units produced and accumulated costs with appropriate analysis. A developed cost accounting system provides immediate information regarding stock of raw materials, work-in-progress and finished goods. This helps in speedy preparation of financial statements.

4. Providing Basis for Operating Policy

Cost accounting helps management to formulate operating policies. These policies may relate to any of the following matters:

o Determination of a cost-volume-profit relationship

o Shutting down or operating at a loss

o Making for or buying from outside suppliers

o Continuing with the existing plant and machinery or replacing them by improved and economic ones

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