what is Cost Accounting?Objectives, Advantages

Cost Accounting: It is a formal system of accounting for costs by means of which costs of products and services are ascertained and controlled.


ICMA defines cost accounting as ” the application of accounting and costing principles,methods and techniques in ascertainment of cost and analysis of saving and or excess as compared with previous experience or with standards”.

Cost accounting is a process of collecting, recording, classifying, analyzing, summarizing, allocating and evaluating various alternative courses of action & control of costs. Its goal is to advise the management on the most appropriate course of action based on the cost efficiency and capability. Cost accounting provides the detailed cost information that management needs to control current operations and plan for the future.

Costing: The techniques and process of ascertaining cost is known as costing. The technique in costing consists of principles and rules with govern the procedure of ascertaining cost of products or services.

costing is the classifying,recording and appropriate allocation of expenditure for the determination of the costs of products or services._Wheldon.

Objectives of Cost Accounting:

1. To ascertain the cost per unit of the different products manufactured by a business concern;

2. To provide a correct analysis of cost both by process or operations and by different elements of cost;

 3. To disclose sources of wastage whether of material, time or expense or in the use of machinery, equipment and tools and to prepare such reports which may be necessary to control such wastage;

4. To provide requisite data and serve as a guide for fixing prices of products manufactured or services rendered;

5. To ascertain the profitability of each of the products and advise management as to how these profits can be maximised;

6. To exercise effective control if stocks of raw materials, work-in-progress, consumable stores and finished goods in order to minimise the capital locked up in these stocks;

7. To reveal sources of economy by installing and implementing a system of cost control for materials, labour and overheads;

 8. To advise management on future expansion policies and proposed capital projects;

9. To present and interpret data for management planning, evaluation of performance and control;

10. To help in the preparation of budgets and implementation of budgetary control;

11. To organise an effective information system so that different levels of management may get the required information at the right time in right form for carrying out their individual responsibilities in an efficient manner;

12. To guide management in the formulation and implementation of incentive bonus plans based on productivity and cost savings.

Advantages of Cost Accounting:

Elimination of Wastes, Losses and Inefficiencies: A good cost accounting system eliminates wastes, losses and inefficiencies by fixing standard for everything.

2. Cost Reduction: New and improved methods of production are followed under cost accounting system. It leads to cost reduction.

3. Identify the reasons for Profit or Loss: A good cost accounting system highlights the reasons for increasing or decreasing profit. If so, the management can take remedial action to maintain profitability of the concern. There is no possibility of shutting down of any product or process or department.

4. Advises on Make or Buy Decision: On the basis of cost information, the management can decide whether make or buy a product in open market. The management can rightly choose the best out of many alternatives. Sometimes, spare capacity can be used profitably.

5. Price Fixation: The total cost of a product is available in the costing records. It is highly useful for price fixation of a product.

6. Cost Control: Budgets are prepared and standards are fixed under cost accounting system. The expenses are not permitted beyond the budget amount. The actual performance is compared with standard to find the variation. If there is any variation, reasons are find out and the management can exercise control. Period to period cost comparison also helps cost control.