Page 9 - DCOM202_COST_ACCOUNTING_I

Unit 1: Nature and Scope of Cost Accounting

(iii) The information so provided is to serve the purpose of managerial decision-making such Notes
as introducing a new line of product, replacement of manual labour by machines, make or
buy decisions, etc.
“Cost accounting is the provision of such analysis and classifications of expenditure as will
enable the total cost of any particular unit of production to be ascertained with reasonable degree
of accuracy and at the same time to disclose exactly how such total cost is constituted”.
—Walter W. Bigg

1.1.2 Objectives of Cost Accounting

The objectives of cost accounting are ascertainment of cost, fixation of selling price of product,
proper recording and presentation of cost data to the management for measuring efficiency and
for cost control. Following are the main objectives of cost accounting:

(i) Ascertainment of Cost: Ascertainment of cost is primary objective of cost accounting in
the initial stages of its development. However, in modern times this has assumed the
secondary objective of cost accounting. Cost ascertainment involves the collection and
classification of expenditures at the first instance. Those items of expenditures or expenses
which are capable of charging directly to the products manufactured are allocated. Then
the other expenses which are not capable of direct allocation are apportioned on some
suitable basis. Thus the cost of production of goods manufactured is ascertained. In this
process, cost accounting involves maintenance of different type of books to record various
cost elements. Cost of production is ascertained by using any of the costing technique and
method such as historical costing, standard costing, marginal costing, job costing, unit
costing, etc.

(ii) Fixation of Selling Price: Every business enterprise aims at maximising profit. The total cost
of production constitutes the basis on which selling price is fixed by adding a part of profit.
Cost accounting furnishes both the total cost of production as well as cost incurred at each
and every stage of production. No doubt other factors are taken into consideration before
fixing of selling price such as market conditions, the area of distribution, volume of sales,
etc. But cost plays the dominating role in the price fixation.
(iii) Cost Control: At one time cost control was considered as secondary objective of cost
accounting. But in modern business it constitutes the primary objective. Cost control
is exercised at different stages in a industry, viz., acquisition of materials, recruiting of
labour, during the production process and so on. As such, we have material cost control,
labour cost control, production cost control, quality control and so on. However, control
over cost is exercised through the techniques of budgetary control, historical costing and
standard costing. The control techniques enable the management in knowing the operating
efficiency of a business organisation.

(iv) Provide Various Policies: Cost data to a great extent helps in formulating the various
policies of a business or industry and in decision-making. As every alternative decision
involves investment of capital outlay, costs play an important role in decision-making of
organisation. Therefore, availability of cost data is a must for all levels of management.

Did u know? The management of every business or organisation constantly relies upon the
reports on cost data in order to know the level of efficiency relating to purchase, production,
sales and operating positions. Financial accounts provide various information only at the
end of the year because closing stock value is available only at the end of the year. But cost
accounts provide the value of closing stock time to time by a system of continuous stock
verification. Using the value of closing stock, it is possible to prepare final accounts and
know the operating results of the business or industry.

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