Evolution, Importance and Advantages of

Cost Accounting

Historical Development (Evolution)

The origin of cost accounting, along with the origin of bookkeeping itself, is unknown.

Manuals for double-entry bookkeeping before the 19th century were common, but little or no mention was made" of manufacturing or costing methods until Charles Babbage in England (approximately 1830) presented a paper that emphasized the need for serious cost accounting

The structure of modem factory cost accounting was established before World War I.

Beginning about 1930 businessmen and economists became impressed with the magnitude of the costs of distribution and cost accountants therefore began to extend their factory techniques to cover the control of distribution activities.

During World War II emphasis on cost control was reduced, but Postwar competition, led to a rapid return to cost control.

Difficulties arose with regard to the measurement of certain governmental and institutional services, and unfortunately many costs exhibited erratic behavior .

The problem of costing has been studied by the government in Great Britain, particularly in relation to the cost of medical services

The professional status of cost accounting is encouraged by organizations such as the National Association of Accountants, Controllers Institute of America, Institute of cost and works Accountants, Society of Industrial and cost accountants of Canada and similar groups.

Case StudyBased on Cost Accounting

Facts of the Case

ABC Pvt. Ltd, a new comer in small manufacturing firm of formals and casuals wears.

By considering all the factors determining cost, such as cost structure, condition of market, type of consumer, area of distribution, capacity of supply, product’s demand & supply, etc… Manager has to decided to follow the Cost Accounting for maintaining factory A/c or Manufacturing A/c.

It includes detailed & relevant cost figure of closing stock, raw material, work-in-progress and Finished goods, Which helped the manager to find out most suitable and accurate cost per unit.

These also helped him to avoid - material wastages, use of obsolete machinery, poor planning, etc…

They took control over material, labour and overhead expenses, and started discussing day-to-day operations of business.

Moreover, they introduced a cost reduction programme combined with operational research and value analysis.

Questions for Discussion

(1) How cost Accounting helps the firm in determining the Selling Price?

Soln: - Cost accounting provides detailed and relevant cost figures for determining the selling price of products or services. However, regard must be had to the cost structure, condition of the market, the type of consumer, demand for the product and supply thereof. A cost accountant should not only accurately ascertain the total cost but also analyze such total cost under variable and fixed cost so that management may quote prices even below total cost but above variable or marginal costs for increasing volume of sales leading maximization of profit.

(2) According to you, by adopting Cost Accounting method, Can a firm prepare a

Financial Statement? Soln: - In order to prepare financial statements it is

required to determine the stock-values at the end of the period over which such financial statements are to be prepared. Physical stock-taking is a lengthy procedure and the business has to be closed down for stock-taking purpose. Where cost accounts are kept, the ascertainment of the value of closing stocks of raw materials, work-in-progress and finished goods become easy and as such financial statements can be prepared monthly or even weekly.

(3) Which kind of operating policy decision can we take by using Cost Accounting Method?

Soln: - These policies may be-

Determination cost-volume-profit relationship;

Whether to shut down or operate at a loss;

Whether to make or buy from outside suppliers; and

Whether to continue with the existing plant and machinery or to replace them by improved and economic ones.

(4) From the case, what are the benefits/ Advantages enjoyed by a firm, by adopting Cost

Accounting? Establishment of more accurate unit costs. Elimination of inefficiencies in plant

operation. Presentation of more frequent and more

accurate financial accounts with the help of perpetual inventory system of stock control.

Other Importance ofCost Accounting

Ascertainment of costs

Determining and controlling efficiency

Other Advantages

Development of cost comparisons. Establishment of increased operating

efficiency. Assisting in developing cost calculations for

new products and designs. Establishment of an effective costing system

prevents manipulation.