OBJECTIVES OF COST ACCOUNTING

OBJECTIVES OF COST ACCOUNTING

The main objectives of cost accounting are explained as below:

(i) Ascertainment of Cost: The main objective of cost accounting is accumulation and ascertainment of cost. Costs are accumulated, assigned and ascertained for each cost object.

(ii) Determination of Selling Price and Profitability: The cost accounting system helps in determination of selling price and thus profitability of a cost object. Though in a competitive business environment, selling prices are determined by external factors but cost accounting system provides a basis for price fixation and rate negotiation.

(iii) Cost Control: Maintaining discipline in expenditure is one of the main objective of a good cost accounting system. It ensures that expenditures are in consonance with predetermined set standard and any variation from these set standards is noted and reported on continuous basis. To exercise control over cost, following steps are followed:

(a) Determination of pre-determined standard or results: Standard cost or performance targets for a cost object or a cost centre is set before initiation of production or service activity. These are desired cost or result that need to be achieved.

(b) Measurement of actual performance: Actual cost or result of the cost object or cost centre is measured. Performance should be measured in the same manner in which the targets are set i.e. if the targets are set operation-wise, and then the actual costs should also be collected and measured operation- wise to have a common basis for comparison.

(c) Comparison of actual performance with set standard or target: The actual performance so measured is compared against the set standard and desired target. Any deviation (variance) between the two is noted and reported to the appropriate person or authority.

(d) Analysis of variance and action: The variance in results so noted are further analysed to know the reasons for variance and appropriate action is taken to ensure compliance in future. If necessary, the standards are further amended to take developments into account.

(iv) Cost Reduction: It may be defined “as the achievement of real and permanent reduction in the unit cost of goods manufactured or services rendered without impairing their suitability for the use intended or diminution in the quality of the product.”

Cost reduction is an approach of management where cost of an object is believed to be further reducible. No cost is termed as lowest and every possibility of cost reduction is explored. To do cost reduction, the following action is taken:

(a) Each activity within an entity is segmented to analyse and identify value added and non- value added activities. All non-value added activities are eliminated without affecting the essential characteristics of the product or process. Value chain Analysis, a strategic tool, developed by Michael Porter, is one of the method to do value analysis.

(b) Conducting continuous research and study to know better way to do anything. The three-fold assumptions involved in the definition of cost reduction may be summarised as under:

      (a) There is a saving in unit cost.

      (b) Such saving is of permanent nature.

      (c) The utility and quality of the goods and services remain unaffected, if not improved.

(v) Assisting management in decision making: Cost and Management accounting by providing relevant information, assists management in planning, implementing, measuring, controlling and evaluation of various activities. A robust cost and management accounting system not only provides information internal to industry but external also.