LEE, VENICE December 20, 2021

COACCON/ UNIT 1

ESSAY: This will help you express your understanding of the concept. Answer each
item briefly in complete sentences.

State the meaning and scope of cost accounting.

DEFINITION
Cost Accounting is the subfield of accounting that records, measures,
and reports information about costs. It is the process of determining and
accumulating the cost of a product or activity. Consequently, provides
information to management accounting and financial accounting, and
measures and reports financial and other information related to the
organization’s acquisition and consumption of resources.

SCOPE
A cost accounting system is a system used by an organization to gather, store,
and analyze data about costs. Its purpose is to provide management with
detailed information about costs and profits. This is often the basis for a
management accounting system. It involves classification, accumulation,
assignment, and control of cost.

The traditional role of cost accounting is to record full product cost

data for external reporting and pricing remains important, cost accounting for
decision making planning and performance evaluation has gained importance
in recent decades. Consequently, cost accounting must actively work with
management to determine what accounting information is needed. The scope
of cost accounting has broadened to include application of mathematical and
statistical techniques to cost analysis, consideration of how accounting affects
managerial decisions models used in finance, economics, and operations
management; and examination of the motivational impact of accounting. Cost
accounting is no longer restricted to manufacturing companies. It is now used
in virtually every organization, including banks, fast-food outlets, professional
organizations, hospitals, and government agencies. 

Explain the objectives of cost accounting.

There are five major objectives of cost accounting namely the following;

Determining selling price - one of the most basic objectives of cost accounting
is to trace the cost of a product in order to determine the right selling price. It
provides relevant data and helps in fixing the price of the product. Cost
accounting allows managers to understand the cost of each product in order to
fix and determine a particular selling price.

Controlling cost - The outcomes of cost accounting can help to control the
overall costs of a business. It can help to organize cost reduction programmes
such as standard costing, budgetary control, proper presentation and reporting
of cost data and cost audit. In other words, cost accounting helps the business
to have a maximum and better production at minimum cost. 

Providing information for decision-making - decision making is an important

aspect in a business especially that a firm's fate is at cost, hence it is important
to make the right and sound decisions. Cost accounting helps the management
to take right decisions about the production of a company because it provides
information and alternatives which will help the management to compare
which is advantageous and better for the company. It supplies necessary and
relevant data to the managers and managers analyze those detailed cost
information supplied by cost accounting and accordingly take decisions or
make strategic decisions and implement policies as per the information
collected.

Ascertaining costing profit - it enables the management to ascertain the cost of

product, job, contract, service, or unit of production so as to develop cost
standard. Cost ascertainment is an important objective by cost accounting as it
records each and every element relating to production activity and data
collected is analyzed by managers in determining the true and actual cost of
products.

Facilitating preparation of financial and other statements - It provides all

necessary data to the company as they are able to make the statement of
production at a specific time. Cost accounting facilitates the preparation of
daily, weekly, and monthly reports regarding stock of raw materials, work in
progress, and finished goods. In the absence of cost accounting, management
is forced to rely on year-end financial statements prepared under the financial
accounting. Additionally, it helps management to take stock of production,
sales, and operating results from time to time and prepare financial statements
as and when required. Lastly, cost accounting provides the value of closing
stock at frequent intervals by adopting, “continuous stock verification”
 system. Using the value of closing stock it is possible to prepare final accounts
and to know the operating results of the business.

    3. Differentiate cost accounting and financial accounting.

Cost accounting and Financial accounting are accounting methods that
play an imperative role in business particularly in helping make effective
economic decisions. However, each of them have a distinct role in different
aspects. In definition, Cost accounting is referred to as a form of managerial
accounting that is used by businesses to classify, summarize and analyze the
different costs with the purpose of cost control and cost reduction and thereby
helping management in making better decisions. Whereas, Financial
Accounting  is a branch of accounting that is concerned with the summarizing,
recording and reporting of financial transactions that take place in a business
concern over a time period.  There significant differences and below are some
of them;

Purpose - Cost accounting is an accounting system, through which an

organization keeps the track of various costs incurred in the business in
production activities. Financial accounting, on the other hand, is an accounting
system that captures the records of financial information about the business to
show the correct financial position of the company at a particular period.

Information type - Cost accounting records the information related to

material, labor, and overhead, which are used in the production process. While
Financial accounting records the information which are in monetary or
accountable terms.

Type of cost determined - Cost accounting determines both the historical and
predetermined costs, while Financial accounting only historical cost.

Users - the information provided by the cost accounting is used only by the
internal management of the organization. The users of financial accounting, on
the other hand, are internal and external parties.

Time of reporting - In cost accounting, details are frequently prepared and

reported to the management. While in financial accounting, financial
statements are reported at the end of the accounting period which is normally
1 year.

Profit Analysis - Cost accounting, generally profit is analyzed for a particular

product, job, batch, or process. While financial accounting, income,
expenditure, and profit are analyzed together for a particular period of the
whole entity.

1.
 1.

Mandatory - The use of cost accounting is not mandatory in all companies.

Only those using manufacturing processes must use cost accounting. Yet, the
use of financial accounting is a must for all organizations.

2.

1.

Objective - Cost accounting helps you determine the expenses associated with
each of your products. Financial accounting helps better understand a
company’s profitability through its financial statements

4. Identify the importance of cost accounting in a production unit.

Cost accounting is an essential accounting method in  a production unit
because of various reasons. One of the reasons is that it allows management
systems to estimate the cost of the products for profitability analysis, cost
control, and inventory valuation. It is to understand the accurate cost of
products and to determine whether the process is profitable or not.
Consequently, it helps the business to lower the cost of the business operation
by identifying which product is profitable, thus leading to profit maximization.
Another is that it allows management to check the raw materials in each stage
of production. Additionally, it provides information which enables the
management to fix selling prices for various items of products and services in
different circumstances. Furthermore, it also helps in understanding the
closing value of materials inventory, work-in-progress and finished goods
inventory for preparing the financial statement. Thus, it will be able to
maintain just-in-time inventory systems, leading to saving the company from
storing materials and save costs related to storage, security, and obsolescence.
Lastly and most importantly, it assists the management in decision-making
about costs related to the business, and in order to take proper actions towards
particular situations.

5. State the limitations of Cost Accounting.

It is expensive - highly paid cost accountants and installation of an

organization for the costing system involves additional expenditures. Also, it
will require additional labor charges since there is a need for more workers for
analysis, allocation, and absorption of overheads. Therefore, using cost
accounting is not economical in the business especially for small and medium-
size entities. 
It is not reliable - cost accounting is based on estimates, for instance indirect
costs are not charged fully to a product or process, it is charged to all the
products and processes on the basis of estimates. Actual cost varies from the
estimated cost. Due to these limitations, reconciliation is needed to be
undertaken for verification of the reports. The information and results
provided in financial accounting and cost accounting may be different, hence
requiring reconciliation to find out the correctness of the two before taking any
decision.

It is unnecessary - it is argued that many industries have prospered well and

are still prospering without cost accounting. It only gives duplication of work.

The Cost system does not control cost - cost accounting is not applicable to
all industry types, hence if it is an unsuited costing system it will naturally
bring failure.  Also, it only tells us the increase or decrease in cost, but it will
not be able to control since it is just a tool to inform management and expect
the management to take action, if there is no action the report will be useless