Cost Accounting
Cost Accounting is a method of accounting in which all elements of cost incurred in carrying out an activity or accomplishing a purpose are collected, classified, and recorded. This data is then summarized and analyzed to arrive at a selling price, or to determine where savings are possible. In contrast to financial accounting cost accounting considers it as the economic factor of production.
Purposes of Cost Accounting:
Ascertainment of costs: The first and foremost purpose of cost accounting is to ascertain the cost using various costing methods.
Determining and controlling efficiency: A cost accountant must study the various operations in involved in the manufacture of products. This study will enable him to render the service of measuring the efficiency of the organization and in doing so he will be able to devise means of exercising efficiency.
Determining the selling price: Cost accounting provides detailed and relevant cost figures for determining the selling price of products or services
Preparation of financial statement: Where cost accounts are kept, the ascertainment of the value of closi8ng stocks of raw materials, work-in-progress and finished goods becomes easy and as such financial statements can be prepared monthly or even weekly.
Providing a basis for operating policy: Cost accounting plays an important role in the management for formulating the operating policies.
Components of a Cost Accounting System:
A cost accounting system requires five components which include 1) an input measurement basis, 2) an inventory valuation method, 3) a cost accumulation method, 4) a cost flow assumption, and 5) a capability of recording inventory cost flows at certain intervals. It is well designed from the various combinations of the alternatives, although not all of the alternatives are compatible. Selecting one part from each category provides a basis for developing an operational definition of a specific cost accounting system.
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