The
main objectives of Cost Accounting are as follows :
(i)
Ascertainment of cost.
(ii)
Determination of selling price.
(iii)
Cost control and cost reduction.
(iv)
Ascertaining the profit of each activity.
(v)
Assisting management in decision-making.
1
Ascertainment of Cost: There are two methods of ascertaining
costs, viz., Post
Costing and Continuous Costing.
Post Costing
means, analysis of actual information as recorded in financial books.
It is
accurate and is useful in the case of “Cost plus Contracts”
where price is to be determined
finally on the basis of actual
cost.
Continuous Costing, aims at collecting information about cost
as and when the activity takes
place so that as soon as a job is
completed the cost of completion would be known. This
involves
careful estimates being prepared of overheads. In order to be of any
use, costing
must be a continuous process.
Cost ascertained by the
above two methods may be compared with the standard costs which
are
the target figures already compiled on the basis of experience and
experiments.
2.Determination
of selling price: Though the selling price of a product is
influenced by
market conditions, which are beyond the control of any
business, it is still possible to
determine the selling price within
the market constraints. For this purpose, it is necessary to
rely
upon cost data supplied by Cost Accountants.
3.
Cost control and cost reduction: as “The guidance and
regulation, by executive
action of the cost of operating an
undertaking”. The word “guidance” indicates a goal or target
to be guided; ‘regulation’ indicates taking action where there is
a deviation from what is laid
down; executive action denotes action
to “regulate” must be initiated by executives i.e.
persons
responsible for carrying out the job or the operation; and all this
is to be exercised
through modern methods of costing in respect of
expenses incurred in operating an
undertaking. To exercise cost
control, broadly speaking the following steps should be
observed:
(i)
Determine clearly the objective, i.e., pre-determine the desired
results;
(ii)
Measure the actual performance;
(iii)
Investigate into the causes of failure to perform according to plan;
and
(iv)
Institute corrective action.
The
target cost and/or targets of performance should be laid down in
respect of each department or operation and these targets should be
related to individuals who, by their
action, control the actual and
bring them into line with the targets. Actual cost of performance
should be measured in the same manner in which the targets are set
up, i.e. if the targets are
set up operation-wise, then the actual
costs should also be collected operation-wise and not
cost centre or
department-wise as this would make comparison difficult.
Cost
Reduction, may be defined "as the achievement of real and
permanent reduction in the
unit cost of goods manufactured or
services rendered without impairing their suitability for the
use
intended or diminution in the quality of the product."
Cost
reduction should not be confused with Cost control. Cost saving could
be a temporary
affair and may be at the cost of quality. Cost
reduction implies the retention of the essential
characteristics and
quality of the product and thus it must be confined to permanent and
genuine savings in the cost of manufacture, administration,
distribution and selling, brought
about by elimination of wasteful
and inessential elements from the design of the product and
from the
techniques carried out in connection therewith. In other words, the
essential
characteristics and quality of the products are retained
through improved methods and
techniques and thereby a permanent
reduction in unit cost is achieved. The definition of cost
reduction
does not, however, include reduction in expenditure arising from
reduction in taxa-
tion or similar Government action or the effect
of price agreements.
The three-fold assumptions involved in the
definition of cost reduction may be summarised as
under:
(a)
There is a saving in unit cost.
(b)
Such saving is of permanent nature.
(c)
The utility and quality of the goods and services remain unaffected,
if not improved.
4.
Ascertaining the profit of each activity : The profit of any
activity can be ascertained
by matching cost with the revenue of
that activity. The purpose under this step is to determine
costing
profit or loss of any activity on an objective basis.
5.
Assisting management in decision making : Decision making is
defined as a
process of selecting a course of action out of two or
more alternative courses. For making a
choice between different
courses of action, it is necessary to make a comparison of the
outcomes, which may be arrived under different alternatives. Such a
comparison has only
been made possible with the help of Cost
Accounting information.
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