INTRODUCTION TO COST ACCOUNTING
Purpose The main object of this lesson is to introduce the learner to cost accounting; uses of cost information; cost concepts and the differences between cost accounting and financial accounting Specific Objectives By the end of the lesson the learner should:
- Define cost accounting
- Understand the range of information that could be supplied by the cost accounting system.
- Know the relationships of cost accounting to management accounting and financial accounting
- Understand how raw data are transformed into information
1.1 Definition of and Scope of Cost Accounting
Cost scouting (commonly) termed “costing” may be defined as: „The establishment of budgets, standard costs and actual costs of operations, activities or products; and the analysis of variances, profitability, or the social use of funds’ The accounting system of any organization is the foundation of the internal financial information system. Management needs a variety of information to plan, to control and to make decisions. Information regarding the financial aspects of performance is provided by the costing system.
An important part of the management task is to ensure that operations, departments, processes and costs are under control and that the organization and its constituent parts are working efficiently towards agreed objectives. Although there are numerous other control systems within an organization, for examples production control, quality control, inventory control, the costing system is the key financial control system and monitors and the results of all activities and all other control systems. The detailed analysis and location of all expenditures, the calculation of job and product costs, the analysis of losses and scrap, the monitoring of labour and departmental efficiency and outputs of the costing system provide a sound basis of information for financial control. Cost accounting and financial accounting
Financial accounting can be defined as: ‘The classification and recording of the monetary transactions of an activity in accordance with established concepts, principles, accounting standards and legal requirements and their presentation, by means of profit and loss account, balance sheets and cash flow statements, during and at the end of accounting period’
Financial accounting originated to fulfil the stewardship function of businesses and this is still an important feature. Most of the external financial aspects of the organization, e.g., dealing with accounts payable and receivables, preparation of final accounts etc., are dealt with by the financial accounting system. Of course internal information is also prepared, but in general it can be said that financial accounting presents a broader, more overall view of the organization with primary emphasis upon classification according to type of transaction rather than the cost and management accounting emphasis on the function, activities, products and processes and on internal planning and control information
