What is Cost Accounting? What is the Need for Costing in Accounting?
Cost Accounting is recent development in field of accounting. It is basically concerned with classifying, recording, and appropriate allocation of expenditure to determine cost of products or services. It is application of accounting principles and costing methods for ascertainment of cost so that it can be compared with previous experiences and standards. It is the mechanism by means of which cost of products or services are ascertained and controlled.
It lays down all accounting procedures related to recording of all income and expenditure and preparation of periodical statements and reports with object of minimizing the cost. It also enables controlling of cost and helps management to take decisions related to cost. The basic aim is to control the cost and reduce it to minimum possible level.
NEED FOR COSTING
Every activity involved in production of goods or providing services involves some expenditure. This expenditure maybe direct or indirect, the major purpose of such activity in business organization is to generate profit. Therefore, in order to achieve the goal of earning profit a firm should clearly identify the basic elements of a transaction which are Cost. Profit and Price.
For example, a mobile company launches a new mobile phone with excellent features to capture market. It has to incur Rs. 2000 for material, Rs. 3000 for labor, Rs. 2500 for other expenses on every set produced by it and supplied in market. The company has fixed the selling price of the mobile phone at Rs. 10,000 per piece.
Thus the cost of the phone is Rs. 7500 (2000 + 3000 + 2500, its selling price is Rs. 10,000, and clearly the profit per piece is Rs. 2500 (10,000 —7500). The management requires all such information for purposes of planning, cost control and decision-making. Financial accounting fails to fulfill this need of management which leads to development of new system of accounting cost information of each product, job department, process, etc. is available. All these deficiencies of financial accounting gave birth to “Cost Accounting”.