As per standard definitions, ‘cost’ means the amount of expenditure (which can be either actual or notional) incurred on, or attributable to a given thing. In real life however, costing is subjective and depends on a number of factors that varies from business to business and industry to industry. 'Costing' is defined the classifying, recording and correct allocation of expenditure in order to determine the costs of products or services, the relation of these costs to sales values and the ascertainment of profitability. Cost accounting is the process of accounting for costs. It is a systematic procedure for determining the unit cost of output produced or services rendered. The main functions of cost accounting are to ascertain the cost of a product and to help the management in the control of cost. Costing systems provide a structured overview of costing. It is used in manufacturing industries to track the flow of inventory through various stages of production.Cost accounting systems also capture an enterprise’s costs of manufacturing by evaluating the input costs of each step of manufacturing as well as fixed costs, namely, depreciation of capital equipment. Cost accounting will initially compute and document these costs separately, then analyze input outcomes to output or actual outcomes to assist the enterprise’s management in computing financial accomplishment. It is a way of identifying, arranging and recording proper investment allocation to determine the correct cost of manufacturing. It does so by assessing input costs at each stage of manufacturing, combined with fixed costs like depreciation, of capital equipment, etc.
Cost accountancy applies costing and cost accounting to a business enterprise. Cost accountancy includes determination of selling price of goods or commodity and profitability. It also envisages forecasting of expenses and future probable incomes. Cost accountancy is useful for the management to take informed decisions, initiate cost control measures and ascertain the profitably of the business.
Business organizations work in an ever changing dynamic environment. Accounting systems serve as an effective tool for measuring the financial pulse rate of the enterprise, using a continuous cycle of measurement of results and reporting these results to the management.
While cost accounting presumes determination of selling price and profitability in addition to forecasting of expenses and future probable incomes, it also facilitates the management with cost control initiatives and allows them to take informed decisions. Cost accountancy therefore also covers the following besides costing and cost accounting:
Cost reduction: Businesses exist to make profit. The best way to improve profitability is to ensure that the unit cost of the produced goods or (services rendered) is minimum. Of course, this needs to be done without compromising on the quality or delivery speed.
Cost control: is the process of overseeing and managing project expenses. It also entails preparing for managing the budget and preparing for potential financial risks.
Cost Audit: is the process of verifying whether the organization’s production, marketing and sales processes are managed efficiently.
Benefits of Cost Accounting
Properly implemented costing systems benefit everyone – the management, the employees, the creditors and the economy. Here are the benefits and objectives of Cost Accounting in a nutshell:
The majority of manufacturing decisions is based on information gathered through industrial accounting system. In other words, the main objective of the establishment of industrial or cost accounting systems administrators is to provide information for decision making. An efficient and effective system of industrial accounting alone cannot increase the efficiency and productivity. The information obtained should also be used efficiently in the decision making process. Parties having sufficient control, provide a model for inventory, payroll systems and technology to increase the efficiency of internal control. Accountants in these units try to provide such a system utilizing the best and most useful information available to managers.
Cost Accounting Considerations
Whether simple or complex, there are a few considerations before developing a cost accounting system:
Cost Accounting Systems
A very primary definition of a cost accounting system would be that it is a method of keeping track of costs. While simple conceptually, cost accounting has a profound effect on a businesses’ sustainability and profitability. Such cost accounting systems can range from simple manually operated one to something very elaborate that involves custom developed software. But whether simple or complex, cost accounting should understand and meet the needs of the business. A qualified cost accounting consultant is the ideal person to set it up.
Why does a Business need a proper cost Accounting Consultant?
Cost accounting systems are important for managers to control costs, estimation of cost, profitability analysis and inventory valuation. It is a conscious and rational procedure to accumulate cost and relating such costs to specific entities within the organization in order to take informed decisions. Costing systems are helpful in checking inventory at each stage and help in cost optimization. Accounting systems help managers in understanding value of RM, WIP and finished goods. Thus, it is helpful in maintaining Just in Time inventory and taking immediate decisions without waiting for any reports. Costing systems are used in balance sheets and income statements for the purposes of stock valuation and income determination.
Cost accounting systems are needed by almost everyone who wants to succeed in finance. If there is no in-house expertise (and many small enterprises do not have one nor need one), it is prudent to outsource the task to a competent cost accounting consultant. Fortunately, there are quite a few able cost accounting consultants in cities of India like Pune, Mumbai, etc. who can set up a good system in place, so that the owners can concentrate on their business. Plus, these consultants also give meaningful insights which the businesses can use gainfully.
To summarize, cost accounting is a technique to assist management in establishing various budgets, standards, etc and cost accountancy is the practice of costing and cost accounting. Businesses need an efficient cost accounting system to improve their profitability. Most small businesses do not have the in-house expertise to establish such a system, and prefer to outsource it to professional consultants. Big cities like Pune, Mumbai, etc. in India have such resources and it is better to get a good cost accounting system implemented from such professionals for long term sustainability and profitability of the business.