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Evolution, Importance and Advantages of Cost Accounting: Taruni Jashnani Roll No: 145

Cost accounting is a facet of management accounting that determines the actual costs associated with manufacturing a product or providing a service. It looks at all expenses within the supply chain for budget preparation and profitability analysis. The information derived from this process is useful to managers in determining which products, departments or services are most profitable and which ones need improvement. Cost accounting has evolved over time from simple bookkeeping methods used prior to the industrial revolution to more sophisticated scientific management techniques developed in the late 19th century. It grew in importance during World War I and II when governments used cost-plus contracts. Today, cost accounting provides important benefits like cost control, guidance for future production policies, identification of profitable and unprofitable activities, and periodic profit and

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91 views7 pages

Evolution, Importance and Advantages of Cost Accounting: Taruni Jashnani Roll No: 145

Cost accounting is a facet of management accounting that determines the actual costs associated with manufacturing a product or providing a service. It looks at all expenses within the supply chain for budget preparation and profitability analysis. The information derived from this process is useful to managers in determining which products, departments or services are most profitable and which ones need improvement. Cost accounting has evolved over time from simple bookkeeping methods used prior to the industrial revolution to more sophisticated scientific management techniques developed in the late 19th century. It grew in importance during World War I and II when governments used cost-plus contracts. Today, cost accounting provides important benefits like cost control, guidance for future production policies, identification of profitable and unprofitable activities, and periodic profit and

Uploaded by

Taruni Jashnani
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Evolution, Importance

and Advantages of
Cost Accounting
Taruni Jashnani
Roll No: 145
Cost accounting is a facet of
management accounting that
determines the actual cost
associated with manufacturing a
product or providing a service by
looking at all expenses within the
supply chain.

Introduction to Cost
Accounting It is done for the purpose of budget
preparation and profitability analysis. The
information derived from this process is
useful to managers in determining which
More.. products, departments or services are
most profitable and which ones need
improvement.
Evolution Of Cost
Accounting

• Prior to the industrial revolution, businesses were small and characterized by


simple market changes between individuals and organizations.
• In those times there was a need of accurate book keeping though not that
much of cost accounting. However, by the 17th century insurance, the Royal
Wallpaper Manufactory had a cost accounting system.
• In the 18th century England too began to produce cost accounting
information before the Industrial Revolution.
• Subsequently with the advent of the industrial revolution, large size process
industries performing single activities( eg textiles, railways) came into
being.
• During this period, there was a lack of market for intermediary products
becaue of which cost information gained importance as a tool for
measuring efficiency of different processes.
• It was during the period of 1880-AD1925 that scientific management was
developed which led to convert physical standards into cost standards used
for analysis and control.

• During World War 1 and 2 the social importance of cost accounting grew
with the growth of teach country’s defend expenditure.
• In the absence of competitive markets the Governments in several countries
placed cost plus contracts under which the price to be paid was the cost of
production plus an agreed rate of profit.
• The reliance on cost information by the parties to defence contracts
continued after World War 2 as well. Even today, most of the government
contracts are decided on a cost plus basis.
Importance Of Cost Accounting
Cost accounting has a significant role in determining and controlling the services cost, and that the
success factors of any commercial activity is the use of cost accounting systems and therefore the
importance of cost accounting is as follows:

Costing system also helps in


Cost classification through cost It allows management to understanding the closing
Cost control by collecting
accounting methods, which check the raw materials value of materials inventory,
and recording all the cost
enables us to differentiate in each stage of work-in-progress and finished
elements of the company.
between all types of costs. production. goods inventory for preparing
the financial statement.

It helps the business to lower Cost accounting makes the


the cost of the business basic distinction between fixed
operation by identifying and and variable costs. This is then
controlling relevant items. used by management to fix the
Thus, it leads to profit prices of products, according to
maximization. the costs of the product.
Advantages Of Cost Accounting

Disclosure of profitable and Guidance for future


unprofitable activities: production policies: Periodical determination
Since cost accounting minutely On the basis of data provided of profit and losses:
calculates the cost, selling price by costing department about Cost accounting helps us
and profitability of product, the cost of various processes to determine the periodical
segregation of profitable or and activities as well as profit profit and loss of a
unprofitable items or activities on it, it helps to plan the product.
becomes easy. future.

Relative efficiency of different Control over material and supplies:


workers: Cost accounting teaches us to account
With the help of cost accounting, we for the cost of material and supplies
may introduce suitable plan for according to department, process,
wages, incentives, and rewards for units of production, or services that
workers and employees of an provide us a control over material and
organization. supplies.
THANK YOU!!

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