Cost Accounting Fundamentals
Introduction to Cost Accounting
Cost accounting is an internal reporting system for an organisation’s own management for decision making. It is the process of accounting for costs. It includes the accounting procedures relating to recording of all incomes and expenditures and the preparation of periodical statements and reports with the object of ascertaining and controlling costs. It is thus the formal mechanism by means of which cost of products or services are ascertained and controlled. Cost account is a tool of management that provides detailed records of costs relating to products and services. It also classifies, analyses and interprets cost. It mainly deals with use of costs, planning costs and the control of cost. Cost accounting is both a discipline and process in terms of it being a discipline, it is the branch of accounting. As a process, it entails classification of costs based on their common characteristics. Cost accounting is a process of collecting, analysing, summarizing and evaluating various alternative courses of action. Its goal is to advise the management on the most appropriate course of action based on the cost efficiency and capability. Cost accounting provides the detailed cost information that management needs to control current operations and plan for the future. Since managers are making decisions only for their own organization, there is no need for the information to be comparable to similar information from other organizations. Instead, information must be relevant for a particular environment. Cost accounting information is commonly used in financial accounting information, but its primary function is for use by managers to facilitate making decisions. Cost accounting is often used within a company to aid in decision making, financial accounting is what the outside investor community typically sees. Cost accounting can be most beneficial as a tool for management in budgeting and in setting up cost control programs, which can improve net margins for the company in the future. Unlike the accounting systems that help in the preparation of financial reports periodically, the cost accounting systems and reports are not subject to rules and standards like the Generally Accepted Accounting Principles. As a result, there is wide variety in the cost accounting systems of the different companies and sometimes even in different parts of the same company or organization.
The process of recording, summarizing and reporting the myriad of transactions from a business, so as to provide an accurate picture of its financial position and performance. The primary objective of financial accounting is the preparation of financial statements - including the balance sheet, income statement and cash flow statement - that encapsulates the company's operating performance over a particular period, and financial position at a specific point in time. These statements - which are generally prepared quarterly and annually, and in accordance with Generally Accepted Accounting Principles (GAAP) - are aimed at external parties including investors, creditors, regulators and tax authorities. In other words, Financial accounting is the field of accountancy concerned with the preparation of financial statements for decision makers, such as stockholders, suppliers, banks, employees, government agencies, owners, and other stakeholders. Financial capital maintenance can be measured in either nominal monetary units or units of constant purchasing power. The fundamental need for financial accounting is to reduce principal–agent problem by measuring and monitoring agents' performance and reporting the results to interested users. Financial accountancy is used to prepare accounting information for people outside the organization or not involved in the day-to-day running of the company. Management accounting provides accounting information to help managers make decisions to...
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