What are the Objectives of Cost Accounting?
Cost accounting means allocating and recording all the expenses incurred till the final result which clearly distinguish the costs and allocation for each and every expense.
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Source: Objectives of Cost Accounting (wallstreetmojo.com)
Below is the list of the top 15 objectives of cost accounting –
#1 – Cost Allocation
The primary purpose of cost accountingCost AccountingCost accounting is a defined stream of managerial accounting used for ascertaining the overall cost of production. It measures, records and analyzes both fixed and variable costs for this purpose.read more is to allocate all the expenses incurred to the respective product and bifurcate the cost individually as and for incurred.
#2 – Per Unit Cost of Different Types of Product
Various entities produce many types of products within a factory and purchasing the required product commonly for all the products. Then by correctly analyzing all the costs to the respective products, one can quickly determine the per-unit cost of production for different types of products.
#3 – To Examine the Costs
Sometimes, the management wants to decide whether to produce the product inhouse or outsource the same. For making such a decision, management has to thoroughly examine the costs associated with the production of the product in house, and after that, by comparing the same from the outsourcing proposal, choose wisely.
#4 – For Fixation of Appropriate Per-Unit Price of the Product
By correctly allocating all the expenses incurred, one can easily judge the cost of producing or manufacturing the product as a whole and the number of units produced. It serves a useful purpose to the management for deciding the per unit selling price of the product to be charged from the purchaser as per market demand and supplies and also keeping in view the availability of the substitute.
#5 – For Analyzing the Results from the Different Products
One can quickly determine the results of production of every product such as cost incurred on procurement of material, on labor, on overheads, etc. for each respective product or department wise.
#6 – To Prepare Budgets
Every organization plans its fund utilization and prepares a budget for the productionBudget For The ProductionProduction Budget is a type of financial planning that relates to the units of product that management believes the company should produce in the coming period to match the estimated sales quantity, which is based on the management's assessment of market competition, economic conditions, production capacity, consumer prevailing market demands, and historical trends.read more of each product, which needs the analysis of past costs and future requirements, which can easily be seen from the maintained cost records.
#7 – To Comply with the Legal Requirements as laid upon by the Government
As various legal implications were also laid upon the enterprise to maintain and prepare such records as required by the law on a timely basis and in such manner as prescribed under law. So, for some kind of enterprise, maintaining the cost records is also compulsory.
#8 – To Check the Cost Allocations
When all of the expenses were incurred with regards to the production process, then it helps senior account reconcilers to check whether the proper allocation of all the expenses is done or not.
#9 – Timely Information to Management as and When Required
Sometimes it is seen that the budgeted plans are in variance with actual expenses incurred for producing the product. Thus, correctly maintained cost records help the management to decide the area where cost-cutting may be done or should be done.
#10 – Helps Management in Decision Making
As discussed above, a timely analysis of the cost account that is maintained helps management in making wise decisions regarding future events to have occurred.
#11 – Helps Management in Taking Decisions about Cost Reductions
It is seen that there may be a variance of costs incurred from the budgets prepared with the actual amount incurred. It may sometimes also be because of the government policies and other factors, for instance, suppose we have a manufacturing plant in a remote area. Due to the weather problem, there is an unavailability of raw material to be used in production. If the same could not be made available for the next ten days, then the cost of labor and other overheads for such ten days will be resulting in extra costs that are not considered while preparing budgets.
#12 – Helps Cost Auditor in Easily Analyzing the Data
As per the policies and regulations of the Government, such companies that fulfill the criteria required to maintain such records in a prescribed manner and get them audited by the person authorized to do so in case of cost records by cost auditor. When the cost records are to be audited, then properly maintained accounts and allocation will have a good effect in the mind of the auditor regarding the compliances made by the enterprise and to convince such auditors to issue a favorable report of accounts.
#13 – Acts as a backup in Soft copy Instead of Hard Copy
When records are maintained properly, then it helps the management to easily check the records maintained as and when required from any remote location also. It serves as a backup of all the physical records maintained in the digital form and can be easily kept over the years.
#14 – Helps in Finalization of Financial Statements
At the time of preparation of financial statementsFinancial StatementsFinancial statements are written reports prepared by a company's management to present the company's financial affairs over a given period (quarter, six monthly or yearly). These statements, which include the Balance Sheet, Income Statement, Cash Flows, and Shareholders Equity Statement, must be prepared in accordance with prescribed and standardized accounting standards to ensure uniformity in reporting at all levels.read more, the properly maintained accounts help the financial analysts to easily understand the costs and expenses that an enterprise incurred over some time and could also save time.
#15 – Act as Base for Formulating Policies
By analyzing the properly maintained cost accounts, the management and the decision-making team can easily judge the pros and cons of the decisions considered and to be taken shortly regarding the activities and day to day operations of the business. As proper accounting is done by analysis, one could easily formulate the policies that are laid upon or adhere to.
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