Objective and Limitation of Financial Account and Cost Account

 Financial accounting  

Concept of Financial Accounting

Financial accounting is the process of identifying, measurement and communicating economic information to the users of such information. It is a branch of accounting which is primarily related to the recording, classifying, summarizing and presenting the day to day transaction. It aims to ascertain profit or loss incurred during a particulars period of time through profit and loss account. Similarly, it’s also shows the financial position on a given date through balance sheet.

Financial accounting is historical in nature, since, it records the past transactions.it is the oldest branch of accounting which is equally applicable in the all types of organization. The other branches of accounting have their roots on it. It is based on money measurement concept since, its record the transactions that can be measured in monetary terms only. The accounting principal and standards under financial accounting are generally accepted and universally practiced. It aims to provide information about result of the business operations and financial position to the external and internal users.

0bjective of Financial Accounting

The objectives of financial accounting are mentioned below:

1. To record the financial transaction: the main objective of financial accounting is to record the financial transaction of the business systematically and scientifically. The need of recording the transaction arises due to the limitation of memory power of human being. Under financial accounting transaction are recorded in different books of accounts.

2. To disclosed the result of operation: Another important objective of financial accounting is to disclose the result of operating i.e. profit earned or loss suffered during a particulars period of time. This is achieved by preparing income statement i.e. profit and loss account.

3. To reveal the financial status : Financial accounting , also aims to reveal the financial conditions of a firm on a giving date for this , a statement of assets and liabilities called balance sheet is prepared .

4. To supply necessary financial information: Financial accounting aims to provide information to various parties like government, investor, creditors, owners, financial institutions, etc. Usually the information is supplied at the end of accounting period through various financial statements.

Limitations of financial accounting

Financial accounting suffers from some limitations which are as follows:

1. Disclosed the overall results only: Financial accounting disclosed the overall results of a business. It fails to reveal the results of each department, process, products, jobs, etc.
2. Not helpful in price fixation: Financial accounting does not provide adequate information for fixation of selling prices of products produces or services rendered by business. So, it is not able to prepaid tender or quotations. 
3. No controlling over cost: Financial accounting does not provided proper system of controlling various element of cost like materials, labor, and other expenses. Cost controlling procedures can be adopted by setting standards, but it lacks in financial accounting.
4. No classification of costs: Financial accounting does not classify cost into different categories such as direct and indirect, fixed and variable, controllable and uncontrollable, normal and abnormal, etc. it classifies expenditure into two categories as capital and revenue.
5. Fails to offer a system of standard: Financial accounting fails to measure the efficiency of material, labor and others resources as it does not offer any system of standard.
6. Fails to offer cost information: Financial accounting does not provide cost information to the management to make plans and decisions as well as controlling the operations.
7. Fails to ascertain cost of product and services: Financial accounting fails to ascertain cost of products and services due to lack of cost information.

COST ACCOUNTING

Meaning of Cost Accounting:

Cost accounting is a branch of accounting that has evolved to overcome the limitations of financial accounting. It is the process of accounting for cost , which is concerned more with the ascertainment , allocation, distribution accumulation and accounting aspects of costs.it is that branches of accounting , which deals with the classifications , recording , allocation , summarization and reporting of current and prospective cost . Actually, it is the formal mechanisms by means of which costs of productions and services are ascertain and controlled.

It is an internal reporting system that aims to assist the management for planning and decision making. it primarily emphasizes on cost and deals with collections, analysis interpretation and presentation for managerial decision making on various business problems.

Cost accounting is more concerned with short-terms planning and its reporting period is much lesser than financial accounting. It deals with historic data but it is also futuristic in approach. Cost accounting system cannot be installed without proper financial accounting system. Each organization can be develop a costing system best suited to its individual needs. In financial accounting the major emphasis is given in cost classification based on type of transaction e.g. salaries, repairs, insurance, stores, etc. but in the cost accounting , the emphasis is laid on functions, activities products , processes and on internal planning and control and information needs of the organization.

According to Harold j. Weldon “Cost accounting is the classification, recording, and appropriate allocation of expenditure for the cost of products or services, and for the presentation of suitability arranged data for the purpose of control and guidance of management.”

Similarly, accounting to National Association of accountants – USA. “Cost accounting is a systematic set of procedure for recording and reporting measurement of the cost of manufacturing goods and performing services in the aggregate and in details.”

From the above definitions, it can be concluded that cost accounting is the accounting for cost which aims to provide cost data, statement and reports the costs to assist the management in the planning, decision making and controlling costs.

Objectives and functions of cost accounting

The main objective and functions of cost accounting are mentioned below:

1.      To ascertain cost: The main objective of cost accounting is to ascertain the cost of goods and services. The expenses that are incurred while producing goods or rendering services are called cost. Some examples of cost are materials, labor and other direction and indirect expenses. Under cost accounting, costs are collected, classified and analyzed with the aims of finding out the total as well as per unit cost of goods, service, process, contract, etc.

2.      To analysis cost and loss: Another objective of cost accounting is to analysis the cost of each activities. the analysis of cost is necessary to classify the cost into controllable or uncontrollable , relevant or irrelevant ,profitable or unprofitable , etc. similarly , under cost accounting ,the effect of misuse of material , idle time, breakdown or damaged of machine on the is also analyzed.

3.      To control cost: cost control is a technique that is used to minimize the cost of production and services without compromising on the quality. Cost accounting aims at controlling the cost by using various technique, such as standard costing and budgetary control.

4.      To help in fixation of selling price: Another important objective of cost accounting is to help in fixation of selling price. The cost are accumulated, classified and analyzed to ascertain cost per unit. The selling price per unit is calculated by adding certain amount or percentage profit on cost per unit. Under cost accounting, different techniques such as job costing, batch costing, output costing, service costing, etc. are used to determine the selling price.

5.      To aid the management : cost accounting aims at assisting the management in planning and its implementation by providing necessary costing information that also enables the evaluation of the past activities as well as future planning.

 

Importance /Advantage of Cost Accounting

The importance/ Advantage of cost accounting are prepaid as below:

1.      Helps in controlling cost: cost accounting helps in controlling cost by applying some techniques such as standard costing and budgetary control.

2.      Provide necessary cost information: It provides necessary cost information to the management for planning implementing and controlling, the activities.

3.      Ascertains the total and per unit cost of production: It ascertain the total and per unit cost of production of goods and services that helps to fix the selling price as well.

4.      Introduces cost reduction programmers: It helps to introduce and implement different cost reduction programmers.

5.      Discloses the profitable and non-profitable activities: It disclosed the profitable non profitable activities that enable management to decide to eliminate or contract unprofitable activities and expand or develop the profitable activities.

6.      Provides information for the comparison of cost: I t provides reliable data and information which enables the comparison of costs between periods, volumes of output, department and processes.

7.      Checks the accuracy of financial accounts: It helps checking the accuracy of financial accounts. This is done by preparing cost reconciliation statement.

8.      Helps investors and financial institution: It is also advantageous to investor and financial institution since it disclosed the profitability and financial position of the concern in which they intend to invest.

9.      Beneficial to workers: It is beneficial to workers as well since it emphasizes the efficient utilization of labor and scientific system of wages payment.       

Scope of cost accounting

The scope of cost accounting refers t to the various areas of the study under the purview of the cost accounting as follows:

1.      Cost classification: This refers to the growing homogenous items of the cost into a common grow. Cost classification is a process of arranging the items of the cost into certain categories on the basis of defined criteria. Three common basis of cost classification are (a) element – wise classification (b): function wise classification (c) behavior wise classification.

2        Cost recording: This refers to the posting of cost transaction into the various ledgers maintained under cost accounting system. This involves recording of cost data according to pre- arranged classification.

3        Cost allocation: This refers to allotment of cost to various departments or products on pre-determined basis. Cost allocation is that part of cost attribution which charges specific cost to a cost center or cost unit.

4        Cost determination: This refers to the determination of cost of products (or services) department and other segments or operations of a manufacturing concern. Cost is ascertained in two ways, namely ,(a) statement method (popularly known as cost sheet or cost statement) (b) account method (i.e. production account is prepared under double entry principal)

5        Cost comparison: this involves comparison of the cost of alternatively products, activities and areas of operation in the field of production.

6        Cost control: cost control is a devise of regulating cost of output (or operating) by careful use of the technique of cost accounting. Cost control is exercised through a Variety of technique (such as standard costing, budgetary control, inventory control, quality control). Cost control helps in utilization of resources in the best possible manner.

7        Cost reporting: This refers to furnishing of relevant cost information to the management on a regular basis so as to meet the requirement of management. It is a formal system designed to ensure timely supply of pertinent cost information to the management for their policy –making and operating decision.

8        Cost reduction: Cost reduction represents achievement of real and permanent reduction in the unit of goods manufacture and services rendered. Cost reduction may be brought about by the elimination of wasteful and non- essential elements in design of products. The final aim of cost accounting is the reduction of real cost of goods (or services) on a permanent basis through maintaining (or improving) quality and utility.

Limitation of cost accounting

Besides a number of advantage, cost accounting suffers from a number of limitations. Some of them are mentioned below:

1.      Lack of uniformity: cost accounting lacks a uniform procedure. It is possible that two equally competent cost accounting may arrive at different results from the same information. Keeping this limitation in view, all cost accounting results can be taken as mere estimates.

2.      Conceptual diversity: There are a large number of conventions, estimations and flexible factors such as classifications of cost into its elements, issue materials on average or standard price, apportionment of overhead expenses, arbitrary allocation of joint costs, division of overhead into fixed and variable costs, division of cost into normal and abnormal and controllable and uncontrollable and adoption of managerial and standard costs due to which it becomes difficult to have exact costs. In such a context ,the reliability of cost accounting might below:

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 system is not adopted so it does not enable to check the arithmetic accuracy of the transaction and located the errors.

6.      Developing stage: Cost accounting is in developing stage since its principal, concept and convention are not fully developed.