What is the meaning of Cost Accounting?
Cost accounting is the classification, recording and appropriate allocation
of expenditure for the determination
of the cost of products or services, and for the presentation of suitability
arranged data for the purpose of control and guidance of management. It is an
internal reporting system that aims to assist the it primarily emphasizes on
cost and deals with collection, analysis, interpretation and presentation for
managerial decision making on various business problems.
§ Explain any five objective/functions of cost
accounting.
Five objectives and
functions of cost accounting are mentioned below:
1.
To ascertain cost: under cost
accounting, costs are collected, classified and analyzed with the aim of
finding out the total as well as per unit cost of goods, services, process,
contract, etc.
2.
To analysis cost and
loss: another objective of cost accounting is to analyze the cost of each
activity. The analyze the cost is necessary to classify the cost into
controllable or incontrollable , relevant or irrelevant, profitable or
unprofitable ,etc.
Write any five important/advantage of cost
accounting
§ The
importance/advantage of cost accounting are presented below:
1.
Helps in controlling
cost: cost accounting helps in controlling cost by applying some technique such
as standard costing and budgetary control.
2.
Provide necessary
cost information: it provide necessary cost information to the management for planning,
implementing and controlling, the activities.
3.
Ascertains the total
and per unit cost information: it ascertains the total and per unit cost of
production of goods and services that helps to fix the selling price as well.
4.
Introduce cost
reduction programmers: it helps to introduce and implement different
cost reduction programmers.
5.
Disclosed the
profitable and non -profitable activities: it discloses the
profitable and non-profitable activities that enable management to decide to
eliminate or contract unprofitable activities and expand or develop the
profitable activities.
§ Enlist the scope of cost accounting
§
The scope
of cost accounting can be enlisted as
follows:
1.
Cost classification
2.
Cost recording
3.
Cost allocation
4.
Cost determination
5.
Cost comparison
6.
Cost control
7.
Cost reporting
8.
Cost reduction
§ Discuss any five limitations of cost accounting.
§
Five limitations of cost accounting are as
follows:
1.
Lack of uniformity: cost accounting
lacks a uniform procedure. It is possible that two equally competent cost
accountants may arrive at different results from the same information.
2.
Developing stage: cost accounting is
in developing stage since its principles, concepts and conventions are not
fully developed.
3.
Costly: there are many
formalities which are to be observed by a small and medium size concern due to
which the establishment and running costing system becomes more expensive.
4.
Ignorance of
futuristic situation: the contribution of cost accounting for handling
futuristic situation has not been much. For example, it has not evolved so far
any tool for handling inflationary situation.
5.
Lack of double entry
system: under cost accounting double entry is not adopted. So it does not enable
to check the arithmetical accuracy of the transaction and locate the errors.
§
Write the meaning of
management accounting.
Ø Management
accounting is one of the important branches of accounting. it is primary
concerned with use of accounting data and information for planning, policy
making, decision making and controlling. Its main focus is directed towards
internal planning and control activities. In the words of T. lucey, “management accounting is primarily concern with the data
gathering analysis, processing, interpreting and communication the resulting
information foe use within the organization so that management can more
effectively plan, make decision and control operations.
§ Write any five objectives/function/advantage of
management accounting.
Ø The main objective
and function of management accounting are summarized as under:
1.
To help in
formulating plans: it assists management in planning is based on facts are provided by past
accounts on which forecast of future transaction is made.
2.
To help in the interpretation of financial information: management
accountant presents the accounting information in an intelligent and simple
manner that will help the management in interpreting the financial data,
evaluating alternative course of action available and guiding it in taking
decision to have the most desired financial result.
3.
To help in
controlling performance: management accounting helps in controlling the
performance and take suitable actions in order to correct the adverse deviation
by revising the budgets if needed.
4.
Helps in organizing: management
accountant recommends the use of budgeting, responsibility accounting, cost
control technique and internal financial control. These all needs the intensive
study of the organization structure. In turn, they help to rationalize the
organizational structure.
5.
Helps in solving
business problem: management accounting provides accounting data to the management along
with recommendation as to choose which alternative will be the best.
§ Enlist the scope of management accounting.
Ø The scope of
management accounting can be enlisted as follows:
1.
Continuance of
intuitive decision- making: management accounting is supposed to eliminate
the intuitive decision-making process of management and replace it with
scientific decision-making.
2.
Broad-based scope: the scope of management
accounting is wide and broad-based and this creates many difficulties in the
implementation process.
3.
Mainly based on accounting:
management accounting is mainly based on financial accounting and cost
accounting therefore, the effectiveness of management accounting largely
depends on the effectiveness of these accounting.
4.
Evolutionary stage: management
accounting is a new disciple and a growing subject too. It is still in the
infancy stage and undergoing evolutionary process. Naturally, it faces certain
obstacles before achieving perfection and finality.
5.
Not an alternative
to the management: management accounting is not an alternative to
the management. It just helps the management to carry out its activities.
Ø “Management accounting provides information for
decision making”. Explain or, “management accounting is concerned with
providing accounting information to the management accounting provides both
monetary and non- monetary information” comment this statement.
Ø The management of a
firm is involved in making a number of decision to run a business properly and
smoothly. To make decision, the management needs data and information.
Management accounting collets monetary as well as non-monetary information and
supplies the same to the management for planning, implementation and
controlling. It collects information from financial accounting, cost accounting
provide monetary information only but the management needs some non- monetary
information as well. This need of management is fulfilled by management
accounting.
Management accounting is more concerned with the
interpretation of information to assist the management in planning,
controlling, decision making and appraising performance. Explain.
§ Management
accounting collects and analyzes information from financial and cost
accounting. Besides these it also collects non -monetary and qualitative
information from other sources. The main objective of collection and analysis
of such information is to find out the deviations between the budgeted and
actual performance and takes necessary actions if any deviation takes place.
This types of analysis also assists to make the future plan of the
organization. Under management accounting the responsibilities are assigned to
each person, department and activity. The performance appraised is done in a
regular basis to ensure that the responsibilities are properly information to
the management to perform its different activities.
§ Business planning is one of the basic functions
of management accounting explain.
In an organization, the management carries out
three major activities planning, directing and motivating, and controlling. Out
of these activities planning is very important function. Planning is deciding
in advance the future course of action. Planning requires information which is
provided by management accounting. Management accounting also provides non-
monetary and qualitative information to the management for enabling it for
planning. In this way, business planning remains are one of the important
function of management accounting. Its main focus is directed towards internal
planning and control activities.
- Objective of management accounting are far wider than that of
financial accounting. Explain or, management accounting is more than a
shift from record keeping. Explain.
Ø The development of
accounting shows that financial accounting was evolved first followed by cost
accounting and management accounting. Financial accounting is concerned with
recording the day to day transactions for making the financial statement.
Since, the information derived from financial accounting are used under
management accounting is a shift from financial accounting but, scope of
management accounting goes far beyond this. Financial accounting is historical
in nature. In this way, management accounting follows wider perspective than
financial accounting.
- Financial accounting is historical in nature whereas management
accounting is futuristic in nature elaborate this statement.
Financial accounting
is primarily concerned with keeping the record of the transaction for the
purpose of ascertaining profit/loss as well as financial conditions of the
business. Thus, it is historical in nature. It provides information about the
profit/loss as well as financial conditions after they take place because of
which financial accounting is also called post-mortem examination. Management
accounting is more concerned with the collection of data and information from
various sources for planning policy making, controlling, decision making,
forecasting for future and attempt to reduce the risk and of the business so,
it is futuristic in nature.
Ø Different between financial and cost accounting.
The differences
between financial accounting and cost accounting are mentioned in the following table:
- Purpose: the main objective of financial accounting is to
ascertain the profit earned or loss suffered by a firm during a
particulars period of time as well as financial position on a given date.
But the main objective of cost accounting is to provide costing
information to the management to facilitate planning, policy making and
decision making.
- Statutory obligation: financial accounting is a statutory
obligation for a firm whereas cost accounting is not a statutory
obligation.
- Users: the users of financial accounting are external to
the organization but the users of cost accounting are internal to the
organization.
- Pattern of analysis: financial accounting analysis the business
affairs in totality whereas cost accounting analyses the business affairs
product-wise, service wise, element wise or activity wise.
- Cost control: financial accounting does not have any provision
of cost control but cost accounting aims on controlling costs.
- Differentiate between cost accounting and management accounting:
Ø The differences
between cost and management accounting are presented below:
1.
Meaning: cost accounting is
concerned with the recording of cost, ascertainment of cost of product and
services and analysis of cost of product and services and analysis of cost.
Management accounting is concerned with assisting the management in planning,
decision making and controlling.
2.
Objective: the main objective
of cost accounting is to ascertain, analysis and control of cost. But providing
necessary information to the management is
the main objective of the management accounting.
3.
Nature: cost accounting is
historical as well as futuristic in nature whereas management accounting is
futuristic in nature.
4.
Data: cost accounting
consider the quantitative figures only. Besides the quantitative figures,
management accounting considers the qualitative aspects as well.
5.
Scope: the scope of cost
accounting is comparatively narrow than management accounting.
- Differentiate between financial and management accounting.
Ø The differences between financial accounting
and management accounting are mentioned below:
1.
Users: financial accounting
is more confined to prepare the account to meet the requirements of external
parties. But management accounting provides information to the internal users.
2.
Methods: financial accounting
is based on double entry system. But management accounting is not based on
double entry system.
3.
Principle: financial accounting
is based on GAAP. In addition to GAAP, management accounting is based on
reality, forecasting and analysis.
4.
Measurement: in financial
accounting only monetary transaction are recorded. But in management accounting
certain non-monetary are also considered.
5.
Time span: Under financial
accounting, the reports are generally prepared for a certain period of time
whereas the repots under management accounting can be prepaid at any time as
per requirement.
