Running any business requires immense responsibility. In a company, managers need to know the logistics of every department, from the cost of a box of paper clips to the biggest deal made, in order to run it successfully. Managers who aren’t very involved with their company’s finances don’t usually do well. The ultimate goal is to make a profit by eliminating unnecessary costs. In order to make an analysis of this, cost accounting comes into play.

Cost accounting is one of the different types of ‘accounting’ systems that fall under management accounting. It is a system that has been developed to provide managers with a structure to examine the day-to-day finances of the company, while not having tax factors to worry about. From the information gathered, managers can make decisions on where to cut costs to improve the company’s profitability.

Before proceeding, let take a look about the word Cost Accounting.

Cost Accounting is a process of collecting, recording, classifying, analyzing, summarizing, allocating and evaluating various alternative courses of action & control of costs. Its goal is to advise the management on the most appropriate course of action based on the cost efficiency and capability. Cost accounting provides the detailed cost information that management needs to control current operations and plan for the future

Since managers are making decisions only for their own organization, there is no need for the information to be comparable to similar information from other organizations. Instead, information must be relevant for a particular environment. Cost accounting information is commonly used in Financial accounting information, but its primary function is for use by managers to facilitate making decisions.

Origin of Cost accounting
All types of businesses, whether service, manufacturing or trading, require cost accounting to track their activities. Cost accounting has long been used to help managers understand the cost of running a business. Modern cost accounting originated during the industrial revolution, when the complexities of running a large scale business led to the development of systems for recording and tracking costs to help business owners and managers make decisions.

In the early industrial age, most of the costs incurred by a business were what modern accountants call "Variable cost" because they varied directly with the amount of production. Money was spent on labor, raw materials, power to run a factory, etc. in direct proportion to production. Managers could simply total the variable costs for a product and use this as a rough guide for decision-making processes.

Some costs tend to remain the same even during busy periods, unlike variable costs, which rise and fall with volume of work. Over time, these "Fixed cost" have become more important to managers. Examples of fixed costs include the depreciation of plant and equipment, and the cost of departments such as maintenance, tooling, production control, purchasing, quality control, storage and handling, plant supervision and engineering. In the early nineteenth century, these costs were of little importance to most businesses. However, with the growth of railroads, steel and large scale manufacturing, by the late nineteenth century these costs were often more important than the variable cost of a product, and allocating them to a broad range of products led to bad decision making. Managers must understand fixed costs in order to make decisions about products and pricing.

Why Is Cost Accounting So Important?

There is more to accounting than accounting. Cost accounting is something a lot of business owners rarely think about.I believe that if more companies had better cost accounting we wouldn't have the issues we have in the downturn in the economy today. Businesses that understand cost accounting do well in these economic times and are more profitable than their competitors. Too often companies don't realize they have a problem until it is too late to do something about it

Cost accounting is a specialized branch of accounting, which involves classifications, accumulation, assignment and control of costs.The use of cost accounting concepts and practices is required for a company to be successful. Cost accounting helps managers make better decisions by providing key information for planning and controlling. Cost accounting assists with measuring performance, determining costs & prices for goods or services, reducing costs, managing costs, and analyzing the benefits of an activity or process. Companies need to measure their costs and then understand the behaviour of those costs over varying conditions such as changes in the volume of goods or services produced. once this has been done, the costs can be assigned to the items produced or services provided and the profitability of each can be determined.

Ensure your company survives, and thrives, now by improving your understanding of your costs. "If you can measure it, you can improve it."

Management of business concerns expects from Cost Accounting a detailed cost information in respect of its operations to equip their executives with relevant information required for planning, scheduling, controlling and decision making. To be more specific, management expects from cost accounting - information and reports to help them in the discharge of the following functions:

(a) Control of material cost
Cost of material usually constitute a substantial portion of the total cost of a product. Therefore, it is necessary to control it as far as possible. Such a control may be exercised by (i) Ensuring un-interrupted supply of material and spares for production. (ii) By avoiding excessive locking up of funds/capital in stocks of materials and stores. (iii) Also by the use of techniques like value analysis, standardization etc. to control material cost.

(b) Control of labour cost
It can be controlled if workers complete their work within the standard time limit. Reduction of labour turnover and idle time too help us, to control labour cost.

(c) Control of overheads
Overheads consists of indirect expenses which are incurred in the factory, office and sales department ; they are part of production and sales cost. Such expenses may be controlled by keeping a strict check over them.

(d) Measuring efficiency
For measuring efficiency, Cost Accounting department should provide information about standards and actual performance of the concerned activity.

(e) Budgeting
Now-a-days detailed estimates in terms of quantities and amounts At* drawn up before the start of each activity. This is done to ensured that a practicable course of action can be chalked out and the actual performance corresponds with the estimated or budgeted performance. The preparation of the budget is the function of Costing Department.

(f) Price determination
Cost accounts should provide information, which enables the management to fix remunerative selling prices for various items of products and services in different circumstances.

(g) Curtailment of loss during the off-season
Cost Accounting can also provide information, which may enable reduction of overhead, by utilizing idle capacity during the off-season or by lengthening the season.

(h) Expansion:
Cost Accounts may provide estimates of production of various levels on the basis of which the management may be able to formulate its approach to expansion.

(i) Arriving at decisions
Most of the decisions in a business undertaking involve correct statements of the likely effect on profits. Cost Accounts are of vital help in this respect. In fact, without proper cost accounting, decision would be like taking a jump in the dark, such as when production of a product is stopped.

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