Importance of Cost Accounting (2022)

Multiple operations are going on in any business activity, and it is very much important for the business owner to have a good idea of the cost that each of the activities requires, otherwise, there are chances that the cost incurred in a specific business activity becomes more than the income that the same activity manages to generate. Therefore, to take care of all such things, it is important to have good management of cost accounting. And hence, Cost accounting is one of the significant parts of Managerial Accounting.

So, for the students of Commerce, it is just as important to learn and master the subject of Cost Accounting, like that of Financial Accounting. But before Mastering any of the topics it is important for the students, the value of the subject, in this case, Cost Accounting, adds not only to their own life but in the various operations of the business. In simple terms, it means that the students must learn about the importance of Cost Accounting. Hence, Vedantu explains the importance of cost accounting in a simple and accessible language.

What is Cost Accounting?

Cost accounting is the version of Managerial Accounting, this aims to capture the company's total cost of production. The same is done by assessing the variable costs at each step of production as well as the fixed costs as assessed such as the expense.

The main point in this regard is that -

A Brief Overview of Cost Accounting

Many believe that the concept of cost accounting was developed during the era of the industrial revolution because due to the new global demand and supply of the product it became inevitable for the business owners to monitor their fixed and variable costs and manage their manufacturing process. Cost Accounting is a form of managerial accounting that tries to encapsulate the total cost of production in the business, and it does it by measuring the Variable costs of each phase of production and by measuring the fixed costs, for example, lease expense etc.

The basic forms of cost, included in the cost accounting are Fixed Costs, Operating Costs, Direct Costs, Variable costs, Indirect Costs.

Types of Cost Accounting

There are various types of Cost Accounting:

  1. Standard Costing

Standard costing assigns ‘standards’ to the costs. The standard costs are grounded to the labour and materials to produce the goods and services under standard operating conditions.

  1. Activity-Based Costing

    (Video) Advantages Of Cost Accounting | Importance of Cost Accounting | Cost Accounting

Activity-Based Costing identifies the overhead costs from each department and then assigns specific cost objects like goods or services. The ABC system of cost accounting is based on these activities.

  1. Marginal Costing

Marginal costing is also known as the cost volume profit analysis is the impact where the cost of a product is added to one additional unit into the production unit. This type of costing is useful for short-term economic decisions.

All these types of costs help the management in identifying the impact of cost in the business unit. This type of analysis is used by the management to gain analysis into them potentially to produce profitable products.

Importance of Cost Accounting

The importance of cost accounting is very much useful to the management of an organization, the importance of Cost Accounting is discussed in the following section vividly:

  • Classification of Costs

Cost is a generic term that needs to be classified for further use. Cost Accounting involves the recording and classification of all such costs. Costs involve the prime cost, direct cost, factory cost, selling cost and more other costs. Classification allows the management of the costs and to ascertain the profitability of any such processes and further activities. This also helps in calculating the efficiency.

  • Cost Control

    (Video) Importance of Cost Accounting

This is efficient for the business to focus on controlling the cost of the inventory, labour, and various other kind overhead costs. For example, to achieve maximum efficiency in their inventory management they can adopt the EOQ technique which is the costing technique. Similarly, by analysing the costs of labour and the capacity of machinery their efficiency can be improved also. Cost accounting classifies the overheads into fixed and variable.

  • Price Determination

Cost accounting makes the basic distinction between fixed and variable costs. This is then used by the company or the business unit to fix the prices of the products, according to their costs of the product. The management here finds the most ideal price for the product or the service, which is not too high and not too low. For example, where the economy suffers a depression period.

The businessman lowers the prices of his products to survive the depression circumstances in the economy. He can start this by trying to control the variable costs and to allow him to fix the product’s prices.

  • Fixing of the Standards

The organizations use the standards to make the estimates and the budgets for their future. They use this as the basis to measure the actual efficiency of the process or about the department.

This is an entire branch of cost accounting which is known as Standard Costing dedicated priorly to this process.

Advantages of Cost Accounting

  • Helps in managing costs: As said earlier, the main idea behind implementing cost accounting into the business is to manage the various types of costs. It also helps the management to have an idea of the cost price and selling price of the product and service.

    (Video) Cost Accounting- Importance and Advantages of cost accounting

  • Helps determine the total per-unit cost: The business needs to fix the selling price of the product or the service that they provide, beforehand. For doing so, it is important to know the per-unit cost of production. And hence, the techniques of cost accounting help the manager in knowing the total-per unit cost of production.

  • Helps in understanding the profitable and non-profitable activities: In any business, many activities are going on at any specific point in time, but the thing is that not all business activities are profitable. Hence, the manager needs to know about all the activities which are not making any profit. And cost accounting helps in identifying all those activities.

  • Helps in Fixing the Standards: The business needs to have fixed standards regarding everything. It helps in estimating the budgets for the future. And Cost accounting helps in that there is a whole field of costing dedicated to this called Standard Costing.

An Overview of the Types of Cost Accounting

  • Standard Costing: As the name suggests it helps in assigning the standards to the costs. The factors that are to be considered in standard costing are labour and materials.

  • Activity-based costing: More often than not it is referred to as ABC, due to its initial. When the company assigns the overhead costs to the specific goods or services, Activity-based costing is used.

  • Marginal Costing: to examine the variable costs on the total volume of the production of the output, marginal costing is used. It is beneficial and used quite often in making short-term financial decisions.

If you wish to learn more about cost, costing, and cost accounting then you may follow this link: Cost, Costing and Cost Accounting - Characteristics, Types and Advantages

FAQs

What is important of cost accounting answer? ›

Cost accounting is helpful because it can identify where a company is spending its money, how much it earns, and where money is being lost. Cost accounting aims to report, analyze, and lead to the improvement of internal cost controls and efficiency.

What are the three importance of cost accounting? ›

The objectives of cost accounting

1- Accurately determining product costs, through what cost accounting does of collecting, recording and classifying costs. 2- Controlling over cost elements. 3- Assisting the department in making decisions through adequate cost reporting.

What is the importance of costs? ›

Understanding your costs is vital for informed business decisions. It helps you determine the profitability of your operations and how to set prices. But proper costing is complex, and many businesses aren't doing a good job.

What are the importance and advantages of cost accounting? ›

Cost accounting provides us reliable comparison of products and services within and outside an organization with the products and services available in the market. It also helps to achieve the lowest cost level of product with highest efficiency level of operations.

What is importance of accounting? ›

Accounting is important as it keeps a systematic record of the organization's financial information. Up-to-date records help users compare current financial information to historical data. With full, consistent, and accurate records, it enables users to assess the performance of a company over a period of time.

What is the most important element of cost? ›

Material is the first and most important element of cost. In most of the manufacturing organisations, materials form the single largest component of cost.

What are the 3 most important points in the definition of accounting? ›

According to Bierman and Drebin:” Accounting may be defined as identifying, measuring, recording and communicating of financial information.”

What is an important feature of a cost accounting system? ›

An important feature of the cost accounting system is that it provides the costing data that helps the management in fixing the price of goods and services.

What is the importance of cost planning? ›

Cost planning is an essential part of the project management process. Project managers need to understand where costs fall in their schedule to manage demand for resources. Typically, all resources that consume costs will be included in a resource optimised schedule.

What are important types of cost? ›

  • Direct Costs.
  • Indirect Costs.
  • Fixed Costs.
  • Variable Costs.
  • Operating Costs.
  • Opportunity Costs.
  • Sunk Costs.
  • Controllable Costs.

Who benefits cost accounting? ›

Cost accounting helps zero in on your expenses and how they apply to each aspect of your business. Cost accounting focuses on the expenses involved with running your business. It is a common form of accounting for manufacturing businesses, as it allows them to break out costs for each product they produce.

What is cost accounting nature and scope? ›

Cost accounting shows the profitability or otherwise of each product, process or operation so as to reveal the areas of profitability. (a) It makes use of some important control techniques such as Marginal Costing, Budgetary Control, Standard Costing, etc., in order to control cost.

What are factors of cost? ›

Factor costs include all the costs of the factors of production to produce a given product in an economy. It includes the costs of land, labor, capital and raw material, transportation etc. They are used to produce a given quantity of output in an economy.

What is the most important cost of quality? ›

Perhaps the most important quality cost investment is prevention costs. These investments keep product failure costs to a minimum. Eliminating defects before production begins reduces the costs of quality and can help companies increase profits.

What are the five importance of accounting? ›

Why Is Accounting Important? Accounting plays a vital role in running a business because it helps you track income and expenditures, ensure statutory compliance, and provide investors, management, and government with quantitative financial information which can be used in making business decisions.

What do you mean by cost accounting? ›

Cost accounting is a process of assigning costs to cost objects that typically include a company's products, services, and any other activities that involve the company. Cost accounting is helpful because it can identify where a company is spending its money, how much it earns, and where money is being lost.

What is the most important part of accounting? ›

The most important accounting report for your business is its income statement, also called the profit and loss statement or P&L. This report tells you how much money you're making as well as some other vital data.

Where is cost accounting used? ›

Cost accounting is used by a company's management to determine both variable and fixed expenses connected with the process of manufacturing.

How many types cost? ›

The two basic types of costs incurred by businesses are fixed and variable. Fixed costs do not vary with output, while variable costs do. Fixed costs are sometimes called overhead costs.

What is a cost concept? ›

The concept of cost is a key concept in Economics. It refers to the amount of payment made to acquire any goods and services. In a simpler way, the concept of cost is a financial valuation of resources, materials, risks, time and utilities consumed to purchase goods and services.

How do you measure cost? ›

The retail method measures cost by reducing the sales value of the inventory by the appropriate percentage gross margin. ' The standard cost method involves the creation of cost standards for the quantity and price of inputs of labour, materials and overheads to be used in the manufacture of products.

Does cost-benefit analysis? ›

A cost-benefit analysis is the process used to measure the benefits of a decision or taking action minus the costs associated with taking that action. A cost-benefit analysis involves measurable financial metrics such as revenue earned or costs saved as a result of the decision to pursue a project.

Why cost effective is advantage? ›

One of the advantages of using cost-effectiveness ratios is that they avoid some ethical dilemmas and analytical difficulties that arise when attempting cost-benefit analyses. Applying the alternative analytical technique of cost-benefit analysis requires assigning a monetary value to each year of life.

Who is the father of cost accounting? ›

J. LEE NICHOLSON was looked upon in this country as the "father of cost accounting." This quotation' was introduced into a conversation among a group of CPAs. For a moment the result was only blank stares and lifted eyebrows, until one of the group ventured the ques- tion, "And who, may I ask, is J. Lee Nicholson?"

Why is cost study important? ›

Costing studies provide important insight into the economic burden of disease and can be useful for understanding the resources incurred by health systems, other payers, and patients.

What is the importance of cost sheet? ›

A cost sheet primarily helps you get an accurate account of all costs associated with manufacturing a product or providing a service, and at every stage of operation. They help you not only determine the total overall cost but also the cost per unit of a product.

What is the importance of cost of sales? ›

The Importance of Cost of Sales

Offers insight into your business: When you know your cost of sales, you get a more in-depth look at your business' bottom line. By comparing this metric against others, you can see if the sales revenue you take in surpasses the cost to do those sales in the first place.

What is cost accounting with example? ›

Cost accounting involves determining fixed and variable costs. Fixed costs are expenses that recur each month regardless of the level of production. Examples include rent, depreciation, interest on loans and lease expenses.

What is the importance of cost capital? ›

The cost of capital can thus be thought of as the “hurdle” rate of return required on new investment projects. That is, the minimum rate of return a new project must yield to be undertaken profitably.

Why is it important to cost a product? ›

Product costing is more than just setting a normal price; determining the right price for a certain product can help the business to make data-driven decisions in the process. Knowing how much the company spends to produce a product is not enough when it comes to figuring out the product's sales price.

What is the purpose of cost analysis? ›

1. The primary reason for conducting cost analysis is generally to determine the true (full) costs of each of the programs under analysis (services and/or products). You can then utilize this knowledge to: Identify and prioritize cost-saving opportunities.

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