Answer To: Cost Accounting Final Paper [WLO: 1, 2, 3, 4] [CLOs: 1, 2, 3, 4, 6] Prior to beginning work on the...
Kalaivani answered on Apr 14 2021
Cost Accounting
Cost Accounting
Topic 3
Contents
WHY IS COST ACCOUNTING SO IMPORTANT TO THE SUCCESS OF THE FIRM? 2
WHAT ARE THE VARIOUS METHODS OF COST ACCOUNTING AND HOW ARE THEY USED? 5
REFERENCE 7
WHY IS COST ACCOUNTING SO IMPORTANT TO THE SUCCESS OF THE FIRM?
Cost accounting is a branch of accounting dealing with identification, classification, recording, allocating and analyzing financial transactions of a business having the capacity to impact the cost of the product or service, either directly or indirectly. Cost accounting was applied during the second world when countries outsourced non-military activities to concentrate on military activities. However, then cost accounting was applied only for the determination of contract value (cost plus profit). In today's complex and dynamic business world the application and definition of cost accounting as largely evolved. Cost accounting today is viewed as one of the most important tools used by management for strategic decision making (Salako, & Yusuf, 2016).
Apart from an increase in the size of operation of business other factors have contributed to the surge in the application and utilization of cost accounting across industries. The business organization today isn't confined to any one particular type or nature of the industry. Thus understanding each business operation or type has become more important than ever. Modern-day business organizations aim at specialization and look for details in every operation. Thus to understand the performance including revenues and expenditure is possible only through cost accounting. Management has realized that financial accounting will not serve all the purpose necessary to take strategic and long term decisions since most often the results of financial accounting are consolidated (Weber, 2019). However, in the case of cost accounting, the performance of every business operation or process can be determined with accuracy.
Cost accounting helps management largely with cost determination, cost reduction, and cost control. Though all the three terms sound similar in reality they are extensively different. Cost determination deals with cost identification, recording, and classification of cost. This is the gateway through which the transaction enters the accounting. Cost reduction emphasis the need for cost reduction and the means to reduce the control through labor, material or other overheads (Bouwens, 2017). Cost reduction provides innovative and improved tools and techniques for decreasing the cost of operation. Cost control works towards ensuring the cost is maintained within the admissible limit or the budgetary standards. The aim is not to increase or reduce cost but to adhere to the standards previously set.
As against any type of accounting method, cost accounting has concepts such as cost center, cost unit, and revenue or income center. These concepts help management to identify, reduce and control cost. The units help in differentiation and bifurcation of expenditure and income items with better accuracy. As it is rightly said, the devil is in the details, cost accounting helps businesses to study business in detail and identify strengths and weaknesses to formulate competitive advantage (Kaplan, 2014). With growing complicities and competition the nature and magnitude of need have increased drastically. Management today requires reports and data that financial accounting isn't equipped to furnish. For example, detailed information about inventory or stock, labor performance, productive time, defective items, etc can't be furnished by financial accounting. Though initially cost accounting was mandated only in manufacturing and production houses, however with evolution in business and market cost accounting is adopted even in service industries (Weber, 2019).
Cost accounting emphasis larges on detailing every operation and procedure of the manufacturing or processing of goods and services. With greater access to details, thorough investigation into business is possible. The structured analysis helps in a better understanding of business. From a financial standpoint of view, all categories of cost have a similar impact on business results i.e. reduction in profits. However cost accounting assists in understanding the type, nature, and scope of the cost. The primary duty of cost accounting is to break-down cost to interpret its impact on the business and process stage. The information can be used to restructure business decisions (Cohen & Kaimenaki, 2011).
Management of a business is concerned not just with past data but is equally interested in access to accurate and close to reality business prediction. Cost accounting is one such important tool that is widely used by management to predict future performance. The critical information can be adopted to perceive future trends both within the firm and industry. Thus...