5 essential objectives of Cost Accounting

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.

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.

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.

Cost control and cost reduction

"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 taxa­tion or similar Government action or the effect of price agreements.

The three-fold assumptions involved in the definition of cost reduction may be summarized 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.

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.

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.