INTRODUCTION TO COST ACCOUNTING: CLASSICIATIONS, SCOPES #1

Hello everyone, today we begin with costing. first of all what is costing?

What is cost accounting is: The managers of a company/business have the responsibility of planning and controlling the resources used. To carry out this task effectively, they must be provided with sufficiently accurate and detailed information, and the cost accounting system should be providing this. 

COST ACCOUNTING DEFINED   

Cost accounting by definition is a management information system designed to assist in the efficient management of a business. The system provides information for internal for internet use only. Which is the main feature that distinguishes a cost accounting system from a financial accounting system. Alternatively, cost accounting according to WYSE (2000;3) can be defined as a management information system (MIS)which analyses past, present, future data to provide the basis for managerial action (ICAN,2000:1)  

Furthermore, Horngren and forster  (1987:2) defined cost accounting as management accounting, plus a small part of financial accounting to the extent that its product costing function satisfies the requisites of external reporting.   

The COST ACCOUNTANT INTEREST 

The cost accountant interest in providing the answers to the following types of questions: What has been the cost of goods produced or services provided, or what has been the cost of departments or works section? What have revenue been? Knowing about cost and revenues that are being/have been incurred and earned which enables management to: 

a) Assess the probability of a product, service, a department, or the organization in total; 

b) Perphaps,set selling prices with some regard for the cost of sale; 

c) Put a value to stocks of goods (raw materials, work progress, finished goods) that are still held in store at the end of a period – for preparing a balance sheet of the company’s assets and liabilities.   

THE ORIGINAL SCOPE OF COST ACCOUNTING 

It would be wrong to suppose that cost accounting systems are restricted to manufacturing operations, although they are probably more fully developed in this area of work, service industries, government departments and welfare activities can all make use of cost accounting information. Within a manufacturing organization, the cost account system should be applied not only to manufacturing but also to administration, selling and distribution, research and development etc.   

RESPONSIBILITIES OF THE COST DEPARTMENT  

The cost department according to Mayo (1988:2) is responsible for keeping the cost accounting records. To be properly useful,  

I. These records should analyze production, administration, marketing etc. costs in such a way as to fulfill all the requirements set out above.  

II. The systems should cater for the production of monthly (or four-weekly etc..) performance statements which are necessary to management for control purposes;  

III. The system should also be capable of analyzing; 

a) Past costs (for profit measurement, stock valuation); 

b) Present costs (for control, by means for example of comparing current result against the budget); 

c) Future costs (for budgeting and decision-making) 

THE NEED FOR A COSTING SYSTEM   

If business do not have a costing system, management would not have adequate information on:  

I. The profitability of individual products service or jobs;  

II. The profitability of different departments or operations;  

III. The cost behavior of the various items of expenditure in the organization. This would mean that cost estimation would not be as  accurate as it could be;  

IV. The difference between actual results and expected results and expected results, With an efficient costing system, such differences can be traced to the manager responsibilities;  

V. How to set prices so as to cover costs and generate an acceptable level of profit:  

VI. The effect on profits of increases or decreases in output or the shutdown of a product line or department.

FINANCIAL ACCOUNTING VERSUS COST ACCOUNTING SYSTEMS  

The financial accounting and cost accounting systems in a business both record the same basic data for income and expenditure, but each set of records may analyze the data in a different way. This is because each system has a different purpose.  

I. Financial accounting is primarily a method of reporting the results and financial position of a business. Although the financial accounts may be of interest to management, their principal function is to satisfy the information needs of persons not involved in the day-to-day running of the business. Shareholders for instance may use them to assess how well the directors have carried out their stewardship function. Other outsiders whose information needs are satisfied wholly or in part by the financial accounts are suppliers. Customers, employees and the Inland Revenue. In addition, financial accounts must be prepared in accordance with strict guidelines which are laid down in company and in accounting standards;  

II. Cost accounting is an internal reporting system for the organization own management. It provides them with the information which they need to manage the business. Outsiders will not see this information, as there are not strict rules which govern the way in which cost accounting information should be prepared and presented. Each organization can develop the system which is best suited to its needs. 

PURPOSES OF FINANACIAL COST AND COST ACCOUNTING SYSTEMS
 Since the cost accounting system and for financial accounting system have different purposes and analyze the data in different ways, they are often kept separately in two sets of accounts. However, it is possible to maintain a single integrated set of accounts containing both cost and financial accounting information.  Finally, there is a legal requirement for a financial accounting system. Companies are obliged to prepare annual accounts for external reporting purposes. There is no legal requirement for a costing system which is only necessary if management believes that cost information will help them to plan and control the resources of the organization more efficiently then if no formal costing system existed. There is no point having a costing system if its costs outweigh the benefits it provides.

Thanks for your time till next time.

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REFERENCES

Accountingedu

Accountingcoach

Horngren C.T. (1990) Introduction to Management Accounting, India, Prentice - Hall

Foster G. (1987), Cost Accounting, Managerial Emphasis, New Jersey Englewood Cliffs

Harper W.M. (1974), Cost Accounting, MacDonald and Evans Ltd.