What is cost accountancy and its Objective

 What is cost accountancy

Cost accountancy refers to the process of collecting, recording, classifying, analyzing, summarizing, and interpreting cost data of a company for managerial decision-making. It is a specialized area of accounting that focuses on the identification and measurement of the cost of production or service provided by an organization. Cost accounting is primarily used for internal management purposes, such as budgeting, cost control, and decision-making, rather than external reporting.

In this article, we will explore the definition, objectives, importance, and various techniques used in cost accountancy.

Definition of Cost Accountancy:

The Institute of Cost Accountants of India (ICAI) defines cost accountancy as "the application of costing and cost accounting principles, methods, and techniques to the science, art, and practice of cost control and the ascertainment of profitability."

Objectives of Cost Accountancy:

the main targets of fee accountancy are as follows:

To ascertain the cost of production or services provided by the organization.

To offer correct and well timed information to management for choice-making

To ensure effective cost control and cost reduction.

To facilitate budgeting and performance evaluation.

To aid in pricing decisions.

To provide necessary information for taxation purposes.

Importance of Cost Accountancy:

Cost accountancy plays a vital role in the success of any organization. The following are some of the reasons why cost accountancy is essential:

It provides accurate and timely information to management, which helps in decision-making.

It helps in identifying areas of cost reduction and cost control, which ultimately leads to increased profitability.

It facilitates effective budgeting and performance evaluation.

It helps in pricing decisions, which can determine the competitiveness of the organization in the market.

It provides necessary information for taxation purposes.

It helps in identifying the most profitable products or services of the organization.

Techniques used in Cost Accountancy:

Costing Methods: Costing methods are used to determine the cost of a product or service. There are different costing methods, such as job costing, process costing, and activity-based costing.

Standard Costing: Standard costing is a technique that involves setting a standard cost for each unit of product or service. The actual cost is then compared to the standard cost, and any deviations are analyzed.

Marginal Costing: Marginal costing is a technique that involves the segregation of fixed and variable costs. This technique is used to determine the contribution margin, which is the difference between the sales revenue and variable costs.

Budgeting: Budgeting involves the preparation of a financial plan for a specific period, usually a year. The budget includes projected revenues and expenses, and it serves as a basis for controlling costs and evaluating performance.

Cost-Volume-Profit Analysis: Cost-volume-profit (CVP) analysis is a technique that involves analyzing the relationship between sales volume, costs, and profits. This technique is used to determine the breakeven point, which is the level of sales at which the organization's total revenues equal its total costs.

 the techniques mentioned above, cost accountancy also involves the use of various tools and systems, such as:

Cost Accounting Information System: A cost accounting information system is a computerized system that collects and processes cost data. This system is used to generate reports that help management in decision-making.

Activity-Based Costing: Activity-based costing (ABC) is a technique that involves the identification of activities that consume resources and assigning costs to these activities. This technique is useful in identifying the cost drivers of an organization's operations and determining the actual cost of a product or service.

Variance Analysis: Variance analysis is a technique that involves analyzing the differences between actual costs and budgeted costs. This analysis helps in identifying the reasons for the variances and taking corrective action.

Life Cycle Costing: Life cycle costing (LCC) is a technique that involves considering the total cost of a product or service over its entire life cycle, from design to disposal. This technique is useful in determining the most cost-effective option for a product or service.

Cost-Benefit Analysis: Cost-benefit analysis (CBA) is a technique that involves comparing the costs of a project or investment to its benefits. This analysis helps in determining the feasibility of the project or investment.

The use of cost accountancy techniques and tools is not limited to manufacturing organizations. It can be applied to service organizations as well. Service organizations, such as hospitals, airlines, and banks, also use cost accountancy to measure the cost of providing services.

Cost accountancy is also used in strategic decision-making, such as product mix decisions, make-or-buy decisions, and outsourcing decisions. By analyzing the cost of different options, cost accountancy helps in identifying the most profitable option for the organization.

The objectives of cost accountancy are as follows:

To determine the cost of production: The primary objective of cost accountancy is to determine the cost of production of goods or services. Cost accountancy helps in identifying the different costs involved in the production process and assigns them to different products or services.

To facilitate cost control: Cost accountancy provides a framework for controlling costs. By analyzing the different costs involved in the production process, cost accountancy helps in identifying areas where cost reduction is possible. This, in turn, helps in improving the profitability of the organization.

To aid in decision-making: Cost accountancy provides relevant information to management that aids in decision-making. By analyzing the different costs involved in different options, cost accountancy helps in identifying the most profitable option for the organization.

To facilitate performance evaluation: Cost accountancy helps in evaluating the performance of different departments or products. By comparing the actual costs incurred to the budgeted costs, cost accountancy helps in identifying areas where performance can be improved.

To aid in pricing decisions: Cost accountancy helps in determining the price at which a product or service should be sold. By analyzing the different costs involved in the production process, cost accountancy helps in determining the minimum price at which a product or service can be sold.

To facilitate budgeting: Cost accountancy provides information that aids in preparing budgets. By analyzing the different costs involved in the production process, cost accountancy helps in determining the expected costs for the coming period.

To facilitate inventory valuation: Cost accountancy helps in determining the value of inventory held by an organization. By assigning different costs to different products or services, cost accountancy helps in determining the value of inventory held by an organization.

here are a few more objectives of cost accountancy:

To facilitate cost reduction: Cost accountancy helps in identifying areas where costs can be reduced. By analyzing the different costs involved in the production process, cost accountancy helps in identifying areas where efficiency can be improved, waste can be eliminated, and resources can be used more effectively.

To provide relevant information for management: Cost accountancy provides relevant information to management that aids in decision-making. By analyzing the different costs involved in different options, cost accountancy helps in identifying the most profitable option for the organization.

To facilitate product pricing: Cost accountancy helps in determining the price at which a product or service should be sold. By analyzing the different costs involved in the production process, cost accountancy helps in determining the minimum price at which a product or service can be sold.

To aid in forecasting: Cost accountancy provides information that aids in forecasting future costs. By analyzing the different costs involved in the production process, cost accountancy helps in predicting future costs and aids in budgeting and planning.

To facilitate strategic decision-making: Cost accountancy helps in strategic decision-making. By analyzing the different costs involved in different options, cost accountancy helps in identifying the most profitable option for the organization. This information aids in long-term planning and decision-making.

To provide information for external stakeholders: Cost accountancy provides information to external stakeholders, such as investors and creditors. This information aids in assessing the financial health of the organization and in making investment decisions.

In conclusion, cost accountancy has several objectives, including facilitating cost reduction, providing relevant information for management, facilitating product pricing, aiding in forecasting, facilitating strategic decision-making, and providing information for external stakeholders. By achieving these objectives, cost accountancy helps in improving the financial health and profitability of the organization. cost accountancy is an essential aspect of accounting that involves the identification and measurement of the cost of production or service provided by an organization. It is primarily used for internal management purposes, such as budgeting, cost control, and decision-making. Cost accountancy techniques include costing methods, standard costing, marginal costing, budgeting, and cost-volume-profit analysis. The accurate and timely information provided by cost accountancy helps management in making informed decisions, which ultimately leads to increased profitability and success of the organization.