The relationship between the nature of the Business Enterprise and Cost Accounting

Cost accounting, as will be mentioned later, adopts a cost center approach to accounting for costs. A cost center is any entity in the organization with respect to which costs can be identified and accumulated; it could be a physical entity such as a product, a geographical entity such as a division or region, or it could be conceptual entity such as a department.

The relationship between cost accounting and the nature of the business stems from the fact that the accumulation of costs into cost centers is fully dependent on the nature of the business enterprise. What is a cost center in one business enterprise may not be a cost center in another business enterprise.

The business enterprise may be such that

  1. Individual orders are received from customers for work which is undertaken according to the specific requests of the customer (specific order costing)
  2. Output is the result of a series of continuous operation or processes (process costing)
  3. A service is provided to the customer (operation/service costing)

A cost unit may be defined as the quantitative unit of product or service in relation to which costs are ascertained. The cost unit will be determined by the nature of the business enterprise. It may be:

i) An individual job or batch

ii) A unit of production expressed as a relevant quantity e.g. Kilogram litre e.t.c.

iii) A Unit of service e.g. patient day in hospital or graduate in a higher educational establishment.

The costing and management accounting system is designed and operated such that costs can be identified and accumulated for each unit of output. The costs are then accumulated for the various cost centers and further analysis done to produce useful information for planning, controlling, decision-making and performance evaluation. \

Design and Operation of Cost and Management Accounting Systems

A number of features must be taken into account before finalizing the design of a cost and management accounting system. These are

  1. Nature of the business enterprise
  2. The accounting techniques and methods which will be of use
  3. Volume and type of information which will be needed
  4. The method of recording, processing and communicating information.