Why is Cost Accounting Necessary

Why is Cost Accounting Necessary is discussed in this article. We do hope you find it helpful, informative, and satisfactory.

Why is Cost Accounting Necessary

Importance of Cost Accounting

Why is Cost Accounting Necessary
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There have been a lot of definitions of the concept by article writers all over the internet but in our definition, we will be looking at the two words which come together to form the word ‘Cost Accounting’. The two words are; ‘Cost’ and ‘Accounting’.

‘Cost’ can be defined as the actual or notional amount of expenses that have been incurred or attributed to a particular thing, activity, or event.

In simple words, the cost can be defined as the total amount of resources that are expended or estimated to be expended in the cost of producing a product or rendering a service.

It is the total amount of resources, both intellectual and material that has to be forgone just so that a stated objective can be reached or realized.

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However, if the word ‘Cost is used in terms of action, it should be defined as the act of ascertaining the price of a particular thing either product or service.

On the other hand, ‘Accounting’ can be defined as the process by which economic information is identified, measured, and communicated in order to foster a well-based informed judgment and decisions by those who make use of the provided information.

Accounting equally has a lot to do with the provision of information which is both financial and non-financial that will in turn aid managers of companies or resources and decision-makers to make good decisions or judgments which are based on credible information.

The basic aim of Accounting is to effectively communicate information about the economy to potential investors, shareholders, managers of organizations, creditors, employers as well as the government.

Having looked at the definition of both terms which relate to cost accounting, we’ll carefully define the term ‘Cost Accounting’.

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The Chartered Institute of Management Accountants defined Cost Accounting as “The establishment of budget, standard cost and the actual cost of operations, processes, activities or products; and the analysis of variance, profitability, or the social use of funds.”

Howbeit, we will not go by that definition because of the complexity of the terms involved in the definition above.

In simple words, Cost Accounting can largely be defined as the process of collecting, classifying, accumulating, analyzing, processing, recording, and coding information in relation to cost in order to facilitate planning, controlling, and the ultimate decision-making by the management of a company or organization. In regards to the definition above, ‘Cost Accounting ‘ has some key factors or focus which include the following:

  1. Preparing the financial statement or cost of budget;
  2. Collection of cost data;
  3. Placing in juxtapose, costs to inventory, products, and services; amongst others.

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Importance of Cost Accounting

Nothing is done in this world without the importance attached to it. In regards to the subject matter, the specific aim of establishing a cost accounting unit includes the following:

1. Cost accounting helps to really define the actual cost of goods and services rendered.

2. It helps to confirm the cost of a work section or department.

3. It helps also to determine how profitable a product, service, department, business deal, and even the organization is.

4. It is with the idea of cost accounting that the selling price of a product PR service can be determined.

5. Helps to really check how much has entered into the business or company.

6. Gives a clear insight into the future costs of goods and services.

7. Cost accounting helps to clearly pick out the managerial needs when it has to do with the information in order to come to a sensible and reasonable decision in regard to costs and profits.

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8. It helps to choose and place value on inventories of goods which includes raw materials, goods in process, and finished goods which are still in possession at the end of a period as such helping greatly in the preparation of a balance sheet which may likely contain the assets and liabilities of the company.

9. It also helps to bring in comparison the real costs in juxtapose with the budgeted costs and then look into the variance.

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