Page 10 - DCOM202_COST_ACCOUNTING_I

Cost Accounting – I

Notes 1.2 Nature and Importance of Cost Accounting

The nature and importance of cost accounting can be identified as under:

1.2.1 Nature of Cost Accounting

Cost accounting is a special branch of knowledge. Though considered as a branch of financial
accounts, cost accounting is one of the important special branches of knowledge, i.e., a discipline
by itself. It is an organised body of knowledge consisting of its own concepts, principles and
conventions.
(i) Cost accounting is an art in the sense it requires the ability and skill on the part of cost
accountant in applying the concepts, principles, methods and techniques of cost accountancy
to various management decisions. These decisions include the ascertainment of products
and services, control of costs, ascertainment of profitability, etc.
(ii) Cost accounting is a science as it is a body of systematic knowledge relating to not only
cost accounting but relating to a wide variety of courses such as law, office practice and
procedure, data processing and presentation, production and control, etc. It is necessary
for a cost accountant to have intimate special knowledge of all these field of study in order
to carry on his day-to-day business or organisation activities.
(iii) Cost accounting determines the cost of incomplete work or job in case if the work remains
uncompleted. It is also provides measures for control and guidance for various levels of
management i.e., top, middle and lower management.
(iv) Cost accounting is a profession. In recent years cost accounting has become one of the
important professions which have become more challenging. This view is evident from
two facts. First, the setting up of various professional bodies. Secondly, a large number of
students have enrolled in various institutes to obtain costing degrees and memberships for
earning their livelihood.

1.2.2 Importance of Cost Accounting

The importance of any subject refers to the various areas of study included in that subject. As
regards, the scope of cost accounting is very wide and includes the following:

(i) Technique and Process of Costing: The technique of costing involves two distinct steps,
namely, (a) classification of costs according to various elements and (b) allocation and
apportionment of the expenses which cannot be directly charged to production. As a
process, costing is concerned with the routine ascertainment of cost with a formal and
selected procedure.

(ii) Cost Control: Cost control is the guidance and regulation by executive action of the costs
of operating and undertaking. This guidance and regulation is done by the executive who
is responsible for causing the deviation. This process will become clear by enumerating
the steps involved in any technique of cost control. Cost control is exercised through a
variety of techniques such as inventory control, product control, quality control, budgetary
control, standard costing, etc.
(iii) Ascertainment of Cost: It deals with the collection and analysis of expenses, the measurement
of production at different stages and linking up of production with the expenses. To achieve
the first step, costing has developed different systems such as Historical or Actual Cost,
Estimated Cost and Standard Cost. For achieving the second step, costing has developed
different methods such as single or output costing, job costing, contract costing, etc. Finally,
for achieving the last step costing has developed important techniques such as, Marginal

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