Cost accounting is an extension of accounting as well as management accounting and financial accounting, all pertaining to the accounting structure within an entity, company, or organization at all possible levels.
This extension of accounting deals specifically with the allocation of costs, through the planning, classification and accumulation of information.
For García and Jordà, cost accounting is defined as an information system that allows the valuation of goods and services derived from the productive activity of the company, complying with generally accepted accounting principles.
Hargadon and Múnera indicate that, in a general sense, it would be the art or technique used to collect, record and report information related to costs and, based on such information, make appropriate decisions related to the planning and control thereof.
Objectives of Cost Accounting
This branch of accounting like all others has objectives which are as follows:
1- To inform for subsequent planning in the short, medium and long term.
2- To make a better use of all raw materials, and derivatives of production.
3- To give analytical reports on the economic results.
4- Determine by means of objectives the strategies and tactics to follow.
5- To propose the economic resources available to the company to achieve the proposed objectives.
6- To measure if it is going in the proposed direction.
Importance of Cost Accounting
The information provided by this accounting is of vital importance, since its contribution goes directly to the decision making of a board of directors, or a management team.
1- It captures necessary quantities of inventories, as a result, to know in what liquidity situation is an entity or company.
2- It provides the necessary information for the calculation of the selling price of the products or services that a company makes.
3- It shows which of the products or services reflect a higher percentage of profit and which do not.
4- Thanks to the analysis of fixed and variable costs, the company can be oriented and reach the determination of the break-even point.
5- It breaks down into different elements everything related to the cost of production, where it is possible to visualize where investments are required for the improvement of the facilities, to improve efficiency and production. In the same way, it shows where there are wastes in terms of materials and resources that decrease profitability.
Is Cost Accounting mandatory?
Although it is one of the most indispensable accounting systems in the organization, it is not mandatory, and since it is not, there is no regulatory format for how it should be recorded.
An important point in cost accounting is that it reflects a subjective component, and leaves much room for interpretation. For example, indirect manufacturing costs, where they must be distributed equally among the different products or services. It is recommended that the person in charge of working with this accounting should have the necessary knowledge and be able to interpret these data properly.
How often should cost accounting be performed?
There is no fixed standard, but it is recommended that it be done monthly, although it is possible to do it daily, weekly and quarterly.
It is necessary to take into account the efforts required and the benefits that this brings, to then make the decision of the time in which to work with this accounting.
In this instance any irregularity can be detected almost immediately, and this is one of the benefits that make it stand out.
This has a disadvantage in terms of daily tracking, but nevertheless, it can reflect that everything is correct.
This is done 4 times a year, where accounting and financials are just at a single point at the organizational level and it may be easier to draw conclusions. This does not mean that irregularities that occur between these three months will be overlooked, as it is likely that problem solving will be less efficient.
As a conclusion, although this accounting is not mandatory, it is advisable to use it in the best possible way, i.e. to follow it up on a regular basis and thus be able to solve irregularities efficiently in time.
Bibliographic Reference Consulted
Definition and Objectives of Cost Accounting