Question

Is understanding costs terms and concepts important for small, simpler companies as well as large, complex companies? Discuss fully.

Answer 1

Definition of Cost Accounting:

It is a systematic procedure of recording, analyzing and measuring cost of manufacturing goods and rendering services. It includes methods like recording, classifying, allocating and reporting costs incurred in production of goods or rendering of services and comparing it with standard costs.

It is a management information tool to advice management on how to optimize organisation resources and control current operations and plan for future.

Importance of Cost Accounting, It's Concepts and Terms:

As discussed above cost accounting is an informative tool for management for allocation of current cost and prospective costs. In the modern commercial world, it is one of the most important techniques for a business irrespective of size of business or it's complexities.

Following are some of the importance of understanding of Concepts and terms of Cost:

1. Cost: It is a very broad term which needs to classified for further use. Some cost are prime cost, direct and indirect cost, factory cost, overheads etc.
2. Cost Control: It allows businesses to control cost of inventory, labor ad various other overhead costs. For example: For Inventory management management can adopt EOQ which is costing technique.
3. Price Determination: Cost accounting makes a distinction between fixed and variable cost. It helps in fixing product prices according to their cost.
4. Fixing of Standards: Organisations uses standards to calculate variances with actual performance and budgets for future.Variances are measured to calculate efficiency of operations or department.

Conclusion:

Cost accounting terms and concept are important for business organisations for optimum utilization of their resources, control their cost and stay competitive in this modern business world. Costing is equally important for all businesses to stay competitive, expand and grow.