NATURE AND PURPOSE OF COSTING AND SUPPLY
Definition of and Scope of Cost Accounting
Cost accounting (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. Examples of information provided by a typical costing system and how it is used are given in the following table and the following paragraphs.
Example of costing information and uses
|Information provided by costing system||Possible uses by management|
|Cost per unit of production or service or for a
|As a factor in pricing decisions, production
planning and cost control
|Cost of running a section, department of
|Organization planning, decisions on
alternative methods, wages cost control
|Wages costs for unit of production or per period of production.||Production planning, decisions on alternative
methods, wages cost control
|Scrap/rectification costs||Material cost control, production planning|
|Cost behaviour with varying levels of activity||Profit planning, make or buy decisions, cost
Cost accounting and control
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 output of the costing 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 fulfill 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.