Importance of cost accounting to business concerns

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.