This topic introduces the basic concepts of cost accounting, terminologies and distinguishes cost accounting from financial accounting. It is also aimed at making it clear on what cost accounting is all about and introduce some of the terminologies employed throughout this course.
Accounting is about giving account of various transactions, that is, explaining the transactions to the satisfaction of interested parties. Accounting has been defined by different experts and different institutions, in different ways. The definition that might probably encompass all other attempts at defining Accounting is the one given by the American Accounting Association (AAA). The Association defines Accounting as the process of identifying, measuring and communicating economic information to permit informed judgments and decisions by users of the information”. The AAA definition highlights the need to:
1. Identify users of accounting information and their various needs;
2. Communicate reliable information to users; and
3. Make the information relevant to the decisions they want to make.
Cost Accounting Defined
Different authors have defined cost accounting differently. The following are some of the definitions as given by these authors:
“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.” (Chartered Institute of Management Accountants- CIMA).
“That which identities, defines, measures, reports and analyzes the various elements of direct and indirect costs associated with producing and marketing goods and services. Cost accounting also measures performance, product quality and productivity.” (Leticia Gayle Rayburn).
“A systematic process of collecting, summarizing and recording data regarding the various resources and activities in a firm so as to calculate the basis of production costs used in financial accounting or making other relevant decisions in a firm.” (Horngren C.T)
The main objective of cost accounting is communicating financial information to management for planning, evaluating and controlling performance, and to assist management to make decisions that are more informed. Its data are used by man- agers to guide their decisions.
Cost accounting aims at providing useful information to decision makers to enable them make better decisions. It helps them in preparing various statements such as cash budgets and Cost accounting is a branch of Management accounting that deals with the determination and ascertainment of operation costs. Operations entail the activities that are carried out by an accounting entity. Accordingly these can be:
1. Production operations
2. Service operations
3. Merchandising operations
Production is the value addition process of converting raw materials into useful final products. Service operations entail value addition through offering intangible commodities to customers. Merchandising operations involve buying and reselling operations to offer time, place or other forms of utilities.
Among the important areas of concern in cost accounting include the following:
1. Determination of costs of operations
2. Ascertainment of costs of operations
3. Establishment of budgets and forecasting
4. Pricing decisions
5. Analysis of cost and revenue variances
6. Ascertainment of profitability
7. Valuation of production output
Management accounting is a branch of accounting and financial management that involves identification, generation, presentation and interpretation of financial information for managerial planning, organizing, directing and decision making. It is a branch of accounting that is aimed at providing information for internal use.