Contribution of Cost Accounting to Management

Cost accounting is now used not only by manufacturing organizations but by service and trading organizations as well, both in profit and non profit sectors of economy. It is used as an aid for planning and control of ongoing operations, for evaluation of alternatives and projects, for pricing, for special and non-routine decisions and for external reporting. Cost accountant determines the use to be made of cost data in order to supply the most appropriate information.

1. Planning. Planning is the process of setting objectives and determining the steps needed to attain them. In other words, Planning is the activity by which managers analyze present conditions to determine ways of reaching the desired future.

Planning requires reflective thinking, imagination and foresight. But the planning to be effective must be based on facts and figures. In planning management is interested in future costs. To supply appropriate information cost accountant makes analysis of costs of past operations. These historical costs are adjusted to reflect changes in Iroducts, technology, volume, production efficiency, input c ; t etc. The plans are numerically expressed in the form of budgets. In the planning process budgeting is the area where contribution of cost accounting is most visible.

2. Controlling. Controlling is the process by which management makes sure that intended and desired results are consistently and continuously achieved. The controlling process consists of three  steps:

1.  establishment of standards,
2.  comparison of results against standards and
3.  correction of deviations.

3. Evaluation of Alternatives. Management is frequently confronted with decisions involving choice from different alternative courses of action. Examples include: whether it is less expensive to make or buy a product, whether to continue or discontinue a product, whether to accept or reject a customer’s order at a predetermined price etc. Cost accounting provides information as to how future costs and revenues will be affected under each alternative. Thus cost accounting assists management in making appropriate selection.

4. Inventory Managetnent. Cost accounting assists in inventory management by keeping complete record of materials from the time they enter into the premises till the time they are sold in the form of finished products. This also enables stock valuation to be given quickly for preparing periodic financial statements without any need of physical stock taking. In cost accounting records, values of inventories of materials, work in process and finished goods are available all the time.

Quantitative models for materials planning and management developed by cost accounting enable management to keep stocks of stock.to a the minimum and, at the same time, guard against being out

5. Pricing of Products and Projects. Pricing involves
determination of prices of new products, adjustments in prices of existing products as well as determination of bid prices for contracts. In purely competitive market environment price is determined by economic forces of demand and supply, but in most of the cases conditions of perfect competition do not exist and cost is one of the most important elements to be considered while determining or adjusting the prices. Where the management is required to submit a competitive bid for a contract e.g. construction of a road, supply of uniform to army etc. a similar problem of pricing arises. The decision of management is based on cost data collected by cost accounting.

6. External Reporting. Cost accounting also serves the purpose of external reporting. While making an upward adjustment in the rates of public utilities e.g. electricity, gas, petrol etc. the government must justify the increase before the opposition in legislative assemblies and before the general public. Similarly, a claim of association of transporters or that of a medicine company for a price increase must also be justified before the government in term of cost increase. Here cost accounting comes to the rescue by providing detailed cost reports to be presented to the assembly or to the government regulatory agencies.

7. Analysis of Financial Statements. Financial statements of a business organization ate analyzed by external users and by management to arrive at quantitative decisions regarding profitability, financial strength, trend etc. The external users have to rely on financial statements provided to them in the form of annual reports. But the purposes and ^requirements of an analysis ‘ by the management are more profound.  Cost accounting assists V manage tnent in analysis of financial statements by providing detailed information about sources of profits or losses

Other Related Accounting Articles:

• What is Cost Accounting ?
• Difference between Financial Accounting and Cost Accounting
• Cost of Quality
• Cost Structure
• Planning and Control Cycle Definition
• Cost in cost accounting meaning
• Difference between Job Costing and Process Costing
• Cost Accounting Procedure for Defective Work
• Job Order Costing Questions and Answers
• Financial Accounting