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The Nature of Cost Accounting

The Nature of Cost Accounting

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Cost accounting has been defined by many accounting scholars in various forums. There is no one watertight definition of cost accounting, but the various definitions all point to certain common aspects about the subject. Below are some definitions by certain authorities :

“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 analyses 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” (Letricia 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)
Cost accounting is broad and extends beyond calculating production costs for inventory valuation, which government-reporting requirements largely dictate. However accountants do not allow external reporting requirements to determine how they measure and control internal organizations activities. In fact, cost accounting focus is shifting from inventory valuation for financial reporting to costing for decision making.
The main objective of cost accounting is communicating financial information to management for planning, evaluating and controlling performance, and also to assist management to make more informed decisions.  Its data is used by managers to guide their decisions.  

 Cost Accounting and other Accounting Subjects:
Accounting can be described as a specialized information system that is used for purposes of decision making by the management of the organization and other users such as tax authorities, investors, creditors and the general public.  Accounting is broadly divided into two:
i. Financial Accounting
ii. Management Accounting

Financial Accounting:

This is the analysis, classification, and recording of financial transactions and the ascertainment of how such information will be reported to the various users. It involves the development of general-purpose financial statements largely for external reporting. These statements are developed in accordance with standards imposed by the public (through the professional accounting bodies such as the Institute of Certified Public Accountants of Kenya – ICPAK and the International Accounting Standards Board – IASB) as well as the requirements of the Companies Act Chapter 486.

Management Accounting:

This is the part of accounting that provides special-purpose statements and reports to management and other persons inside the organization. The information generated by management accounting is therefore for internal uses and is not guided by any standards or legal requirements. Management Accounting, unlike financial accounting, is proactive i.e. it is future-oriented. It is required in making decisions that affect the organization.

In a nutshell, cost accounting enables a business to not only find out what various jobs or processes have cost, but also what they should have cost. It indicates where losses are occurring before the work is finished and therefore corrective action can be undertaken.

From the foregoing discussion, it is then clear that cost accounting is very closely related to other accounting subjects especially management accounting. In fact, most people make no distinction between management accounting and cost accounting, as the dividing line between the two is slimmer than thin!

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