Question

ESAAY FORMAT: What ways that a company uses cost accounting, and how it uses financial information for the purposes of cost accounting?

Answer 1

Introduction:

The association of cost accounting is with the management accounting. It is a stream of accounting which looks after the budget preparation, establishing standard costs, calculating actual costs, developing relation between standard costs and actual costs to analyze variances. It also looks after the social use of fund as well as profitability of the business. It measures the performance in form of product quality and productivity both.

Uses cost accounting:

The uses of cost accounting are highlighted below:

Ascertainment of cost: There are different methods in cost accounting which helps in determining costs. Some of these costing techniques are Job Costing, Process Costing, batch costing, and unit costing. These methods are used to ascertain cost for product, job, process, activity, contract, etc.

Strategic decision making: Cost accounting helps management to make strategic decisions such as make or buy decisions, retain or replace decisions, continue or shutdown decisions and so on. The analysis of relevant cost is undertaken to make such strategic decisions.

Cost controlling: Standard costing is used to control costs. In this actual costs are compared with budgeted standard costs. If any variances, corrective actions can be immediately initiated by the company.

Determining selling price: The analysis of various cost by related to product, job or process helps the company to determine the selling price of them.

Identifying unprofitable segments and material losses: The activities involving material losses due to wastage, spill, spoilage, etc. are identified and corrective measures are taken to improve profitability of that unprofitable activities or segments by controlling material losses. In this way, it controls cost and improves the overall efficiency as well as productivity of overall company.

Implication of financial information for cost accounting:

The cost accounting uses financial information to guide management in planning, evaluating and controlling the business performance. The financial accounting simply generates financial information. Cost accounting is a step beyond it. It measures the performance of various activities and initiates measures to control internal activities of the company. Moreover, the use of financial information by cost accounting helps management to take well informed decisions and cost accounting provides required and relevant data for decision making. With the help of financial information, the inter-firm, intra-firm comparison, and comparison with developed standards become possible which guide in improving company’s performance.