INTRODUCTION OF COST ACCOUNTING
Cost accounting is the process of determining the cost of producing some product, providing some
service or undertaking some activity. In abroad sense, it that part of management accounting which
establishes budgets and standard costs and actual costs of operations, processes, departments or
products and the analysis of variances, profitability or social use of funds.
Purpose of Cost Accounting in Planning and Control
1. It indicates where losses and wastes are accruing before the work is finished. Immediate action
can be taken to minimize the losses.
2. It enables management to consider alternative methods and procedures in management in order
to decide whether to manufacture a product or buy it from outside or to continue production at a
loss or adjust the prices.
3. Enables management to arrive at the cost of production of every unit, job, operation, process,
department or service, thus, develop a cost standard.
4. Provides for periodic profits or loss account and balance sheets at such intervals e.g., weekly,
monthly, or quarterly as management may recognize during the financial year either for the
business as a whole, departments or products.
5. Reveals sources of economies in production having regard to methods, types of equipment’s,
design, output or layout.
6. Presents comparative cost data for different periods and various volumes of production.
Management can therefore monitor the development of the business and use the information for
budgetary control.
Cost Accounting versus Financial Accounting
Financial accounting is that part of accounting that covers the classification and recording of actual
transactions of an entity in monetary terms in accordance with established concepts, principles,
accounting standards and legal requirements. It also presents as accurate as possible the effects of
those transactions over a period of time and at the end of financial year. The emphasis of financial
accounting is upon classification by type of transaction and type of expenditure rather than
functional analysis of cost accounting.
Cost Accounting versus Management Accounting
Management accounting is the provision of information required by management for:
1. Policy formulation
2. Planning and controlling the activities of the enterprise
3. Decision making
4. Disclosure to employees
5. Disclosure to shareholders and other interested parties
6. Safeguarding assets
