Impact of Cost Accounting

Topics: Cost accounting, Management accounting, Economics Pages: 10 (3127 words) Published: January 19, 2011

In the modern business world, the nature and functioning of business organizations have become very complicated. They have to serve the needs of variety of parties who are interested in the functioning of the business. These parties constitute the owners, creditors, employees, government agencies, tax authorities, prospective investors, and last but not the least the management of the business. The business has to serve the needs of these different category of people by way of supplying various information from time to time. In order to satisfy the needs of all these group of people a sound organisation of accounting system is very essential. In the ancient days the information required by those who were interested with a business organisation was met by practising a system of accounting known as financial accounting system. Financial accounting is mainly concerned with preparation of two important statements, viz., income statement (or profit & loss account) and positional statement (or Balance Sheet). This information served the needs of all those who are not directly associated with management of business. Thus financial accounts are concerned with external reporting as it provides information to external authorities. But management of every business organisation is interested to know much more than the usual information supplied to outsiders. In order to carry out its functions of planning, decision-making and control, it requires additional cost data. The financial accounts to some extent fails to provide required cost data to management and hence a new system of accounting which could provide internal report to management was conceived of.


The terminology of cost accountancy published by the Institute of Cost and Management Accountants, London defines cost accountancy as “the application of costing and cost accounting principles, methods and techniques to the science, art and practice of cost control and the ascertainment of profitability. It includes the presentation of information derived there from for the financial decision-making.”

On analysis of the above definition, the following features of cost accountancy become evident :
(a) “Cost accountancy” is used in the broadest sense when compared to “cost accounting” and “costing”. This is so because cost accountancy is concerned with the formulation of principles, methods and techniques to be applied for ascertaining cost and profit.

(b) Having ascertained ‘cost’ and ‘profit’, cost accountancy is concerned with presentation of information to management. To enable management to carry out its functions, reports must be promptly made available at the right time, to the right person and in a proper from.

(c) The information so provided is to serve the purpose of managerial decisionmaking such as introducing a new line of product, replacement of manual labour by machines, make or buy, decisions, etc.


The need for cost accounting arises owing to the following : To Overcome the Limitations of Financial Accounts
Financial accounting records in an overall manner the results of the operations of a business, using conventional double entry book-keeping techniques. It suffers from the following limitations :

(i) It provides only past data : Financial accounts provide out of date information to management. But management is interested in current data but not past data as it does not serve any purpose to it. Therefore it has been rightly pointed out that financial accounts provide only a post-mortem analysis of past activities.

(ii) It reveals only over all result of the business : Financial accounts does not provide data for each and every product, process, department or operation separately. Instead it provides the financial information in a summary form for the entire organisation as a whole.

(iii) It is static...
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