Objectives of Cost Accounting

Table of Contents

Cost accounting involves the systematic tracking of expenses and analysis of the same so that an organization is aware of the costs associated with each product it manufactures or service it renders.

With information regarding the cost of each product or service, management can find cost-saving opportunities, fix prices, maximize profits, and so on. Basic objective of cost accounting is :

1. Cost Ascertainment:

→ Enables identification and classification of all costs, distinguishing between direct and indirect costs.

→ Provides a comprehensive understanding of the cost structure, aiding in pricing decisions and cost management.

→ Supports accurate product costing, which is essential for setting competitive prices.

2. Cost Control:

→ Establishes standards and budgets for various cost components, facilitating comparison with actual performance.

→ Identifies and analyzes variances between actual and budgeted costs, enabling proactive cost control measures.

→ Helps in optimizing resource utilization and ensures that costs are aligned with organizational objectives.

3. Cost Reduction:

→ Utilizes cost data analysis to pinpoint areas where efficiencies can be improved and costs reduced.

→ Supports continuous improvement by identifying and eliminating wasteful practices.

→ Contributes to enhancing the overall profitability of the organization by minimizing unnecessary expenditures.

4. Profit Planning:

→ Provides crucial information on costs and revenues for formulating realistic profit targets.

→ Assists in resource allocation and strategic planning to achieve desired profit levels.

→ Guides management in making informed decisions to maximize profitability.

5. Decision Making:

→ Offers relevant cost information for various decision-making processes, such as pricing and product mix.

→ Facilitates informed choices on make-or-buy decisions, capital investments, and resource allocation.

→ Enhances the decision-making capacity of management through a clear understanding of costs and their implications.

6. Performance Evaluation:

→ Enables the comparison of actual performance against budgeted or standard costs.

→ Facilitates the assessment of departmental or individual efficiency and effectiveness.

→ Provides a basis for identifying areas of improvement and recognizing high-performing units.

7. Inventory Valuation:

→ Determines the value of inventory accurately for financial reporting and taxation purposes.

→ Utilizes various methods (e.g., FIFO, LIFO) to allocate costs to inventory based on business preferences and industry norms.

→ Ensures that the financial statements reflect a realistic and fair representation of the organization’s financial position.

8. Facilitates Budgeting:

→ Supplies essential data for preparing operating budgets, capital budgets, and cash budgets.

→ Assists in aligning financial goals with strategic objectives through budgetary planning.

→ Serves as a crucial tool for financial management, helping organizations plan and control their financial activities effectively.

References

Lodha, A. (2015, June 1). Cost Accounting: meaning, objectives, principles and objections. Your Article Library. https://www.yourarticlelibrary.com/cost-accounting/cost-accounting-meaning-objectives-principles-and-objections/55218
Team, W. (2024, January 3). Objectives of cost accounting. WallStreetMojo. https://www.wallstreetmojo.com/objectives-of-cost-accounting/

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