Page 13 - DCOM202_COST_ACCOUNTING_I

Unit 1: Nature and Scope of Cost Accounting

(i) Helps in the Preparation of Final Accounts: By the process of continuous stock taking Notes
it enables to know the value of closing stock of materials at any time. This facilitates
preparation of final accounts wherever desired.
(ii) Fixation of Selling Price: By providing cost data it helps management to fix the selling
price of product in advance. Hence, quotations can be supplied to prospective customers
to secure orders.
(iii) Fixation of Responsibility: Whenever a cost centre is established, it implies establishing a
kind of relationship between superior and subordinates. Thus, responsibilities are fixed on
every individual who is concerned with cost of product or unit.
(iv) Reconciliation with Financial Accounting: A well maintained cost accounting system
militates reconciliation with financial accounting to check the arithmetical accuracy of both
the systems.
(v) Helps in Minimising Wastages and Losses: Cost accounting system enables to locate the
losses and wastages relating to materials, idle time and under utilisation of plant and
machinery.
(vi) Help in Decision-making: It helps top management in suitable decisions such as new
products, replacement of labour, machines, etc.
(vii) Help in Performance of Business: By applying cost control techniques such as marginal
costing, budgetary control and standard costing it helps in assisting the performance of
business or industry.

(viii) Help in Future Production Policy: Cost data help management in determining future
production policy. Any expansion or contraction of production for the future is based on
previous cost data and information.

(ix) Helpful to Employees: Cost accounting system enables employees to earn better wages
through overtime and incentive systems of wage payment. By providing better facilities it
ensures job security to employees. Employees benefit by merit rating techniques which is
conducted by scientific process of management.
(x) Helpful to the Government: It helps government in formulating various policies regarding
import-export, taxation, price control measures, wage fixation, etc. It helps in assessing
excise duty, sales tax and income tax of the business.
(xi) Helpful in Increasing Profitability: Costing reports provide information about profitable
or unprofitable areas of operation. The management can discontinue that product line or
that department which are responsible for incurring losses.

(xii) Helpful to Creditors: It increases the confidence of creditors in the capital employed in the
business. The frequent preparation of reports and statements help in knowing solvency
position of the business.

1.6 Relationship and differences between Financial Accounting and
Cost Accounting

The main relationship between financial accounting and cost accounting are given as under:
(i) The fundamental principles of double entry system are applicable in financial accounting
as well as cost accounting.
(ii) The results of business or organisation are revealed by both the systems of accounts.

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