Administration of financial resources in optimistic way is recognised as financial management (Ellul and et. al., 2015). Cost accounting is one of the division of financial management that helps in minimising the expenses and attaining the business objective in desired manner. This report highlights the key aspects and emerging scope of cost accounting in financial management of organisation.
Accounting of cost data as recording, extracting and allocation of financial cost incurred in different sections are considered as cost accounting. Main purpose of cost accounting is to control the additional cost and enhance the profitability of entity (Christ and Burritt, 2015). The cost reports are pursued by managers and a consolidated report is referred to senior management authorities in order to take favourable decisions in business. Accounting system mainly impact the tendency of accountants because they remain answerable to managers and senior authorities to control the administrative cost of operations and management. In organisational context cost accounting is widely used because it bifurcates the cost of operations and administration in periodic and sectional manner.
Objectives of cost accounting can be classified as;
- To determine cost of different conditions applying various techniques of costing.
- To decide the price of product and services by considering overall manufacturing and operational cost.
- Conducting material, labour and overheads requirements for business is the main aspects of cost accounting.
- Reducing non-operational or non-manufacturing expenses while calculating products and service cost.
Some of the main principle of cost accounting that are discussed below:
Cause effect relationship: In business it is necessary to build cause effect relationship for every product that means that each item of cost must be relevant to the actual cause and the overall impact of these cost on different division of business should be determined (Schmidt, Götze and Sygulla, 2015). Just those organizations which go through the divisions for which these expenses are accrued must bear a cost.
Exclusion of abnormal cost from cost accounts: It is essential for the companies to check that all cost incurred because of abnormal events must not be consider while calculating the unit cost. In case if such happen then it can misrepresent the cost figures and mislead the accounting record that can lead to wrong decision.
Past costs are not taken into consideration to future costs: This simply means that cost of any period must be recorded in the same period. In case if cost of the previous year are consider to be covered in future that can lead to wrong figures. There is some exception cost such as advertisement which are treated as deferred revenue expenses.
Different type of costing systems
Type of costing systems are used by organisations according to their operations need. The key primary systems which are mostly used by entities are described as follows;
Job costing system: This is one of the approach mainly used to analyse the cost implemented on unique product or job centre. A separate batches and sectional cost is calculated on difference sections. This can be understanding by following example in which labour can be tracked by time and cost incurred on particular job (Broccardo, 2014).
In the above job cost sheet it is evaluated that cost mainly employed in different different job section. Admin, travel, Job A, Travel, Job B, Lunch, Job C and travel and admin.
Process costing system: This is the system of calculating cost of different processes. This approach is mainly used in various sectors such as pesticides and cosmetics, petrochemicals, food service, coating and repainting, grooming, shampoos, handicrafts, journal, and so on. In Process costing two main terms are used as normal loss and abnormal loss. The anticipated loss throughout the ordinary course of activities is termed' normal loss' for inevitable purposes, and that is attributable to an intrinsic outcome of the particular process and thus uncontroversial throughout the short run. Officials may identify an approximate amount of usual losses resulting from both the manufacturing process.
The types of costs in cost accounting
There are different kind of cost that are included into cost accounting which are disguised below:
Direct cost: These kind of cost are directly related with manufacturing specific company good and services such as cost of labour, material etc.
Indirect cost: These expenses are unrelated to production process, but have equal importance in order to run business activities. Such as electricity is used to run different machine and cost incurred on this is treated as indirect cost.
Fixed cost: These type of goods does not eventually move or varies with the production level. Such as company pay GBP 2,000 per month however how many product does it produces per month.
Variable cost: This cost changes with the change in the production level because demand of goods keeps on varying due to which labour, material cost also modify.
Operating cost: These kind of expenses are mainly related with daily business activity which can be fixed or variable. For example, lease amount for production unit or machine.
Controllable cost: These are the costs in which administrators have leverage of spending and then have the ability to increase and reduce. For example, making decision about supplies or payrolls manager can make necessary control in order to increase overall cost of company.
Cost disclosure is a method used to notify a consumer (or other group) of both the extent of the expected or actual expense of a development project. Cost statements are usually compiled and regularly updated (maybe monthly) by a cost advisor (including a surveyor) to maintain the customer updated and assist them as well as the technical team in controlling costs (Jasinski, Meredith and Kirwan, 2015). Relative to both the capital budget, this can be expressed either in absolute terms or as a difference. These reports help in analysing the requirements of additional financial resources for attaining business objectives.
The above description concludes the nature of cost accounting and aspects in organisational context. It is resulted that organisation be able to correlate that how utilisation of cost among different departments of business effectively can lead towards desired aim and objectives.
- Ellul, A. and et. al., 2015. Is historical cost accounting a panacea? Market stress, incentive distortions, and gains trading. The Journal of Finance. 70(6). pp.2489-2538.
- Christ, K. L. and Burritt, R. L., 2015. Material flow cost accounting: a review and agenda for future research. Journal of Cleaner Production, 108. pp.1378-1389.
- Schmidt, A., Götze, U. and Sygulla, R., 2015. Extending the scope of Material Flow Cost Accounting–methodical refinements and use case. Journal of Cleaner Production, 108. pp.1320-1332.
- Broccardo, L., 2014. Management accounting system in Italian smes: some evidences and implications.
- Jasinski, D., Meredith, J. and Kirwan, K., 2015. A comprehensive review of full cost accounting methods and their applicability to the automotive industry. Journal of Cleaner Production, 108. pp.1123-1139.