Importance of Cost Accounting (purpose/objectives)

Importance of Cost Accounting (purpose/objectives)

Ascertainment of costs
With the help of cost accounting tools, an entity is able to ascertain the cost of producing goods and providing services. Such costs include the cost of materials, cost of labour as well as the cost of operation overheads.

Control of costs
Cost accounting tools not only help in ascertaining costs but also in keeping track of such costs. One is able to use cost accounting to ascertain cost behavior and devise tools of controlling the incurrence of costs. This enhances organizational production efficiency.
Decision making
Decision making is the process of making a choice from among many and often competing or conflicting alternatives. Managers often encounter various situations that require a choice from the alternatives. Examples include: Whether to buy or manufacture a spare part, whether to hire employees or outsource services, whether to open a new production line, where to open such a line, or whether to discontinue a current line or range of products and lastly, whether to invest in plant and machinery or lease such items. Cost accounting information is useful in making such decisions and other managerial decisions.
Planning and Budgeting
A plan is a projected course of action. Planning involves deciding in advance what to do, how to do it, when to do it, why to do it, and who to do it. Planning is a future oriented aspect of cost accounting and incorporates budgeting. Planning reduces risk and uncertainty and bridges the gap between the present condition and the future.
Estimation of prices
Businesses exist largely to make profits. Profits are only possible if a business sells its goods and services at a price that is higher than the cost of production. Hence prices are usually set at a price above the production cost.

Cost estimation and forecasting
Cost accounting helps in determination of cost and production trends which can then be used in forecasting future cost and future variations in costs.
Evaluation of profitability
Cost accounting avails cost and turnover information that can be used in evaluating the profitability of organizations.
Disclosure of wastes and measurement of efficiency
Standard costing and analysis of variances help in disclosing production wastages and helps put in place systems that will enhance production and operational efficiency.

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