Discuss the nature, scope and limitations of Cost Accounting:
Characteristics of Cost Accounting: Following are the characteristics of cost accounting :
1. Cost Accounting is a Science : Cost accounting is an empirical science, It has its own principles and rules.
2. Empirical Science: Rules of cost accounting are conditioned by the operations, personnel and policy of the undertaking with respect to which its techniques are to be applied.
3. Dynamic Nature:
The principles, rules and techniques of cost accounting are not static but dynamic, They change with passage of time and situation.
4. Social Science:
Its principles cannot be verified and proved by controlled experiments like exact science (like Mathematics, Physics, Chemistry, etc.) because it is a social science.
5. Behavioural Science:
As it is operated by human beings with feelings and emotions, it is also called a behavioural science.
6. It is an Art requiring skill:
It is also an art. So the application of its principle the part of cost accountant.
Scope of Cost Accounting:
The scope of cost accounting cover five aspects:
(i) Cost ascertainment or costing
(ii) Cost Accounting
(iii) Cost presentation
(iv) Cost control, and
(v) Cost audit
(1) Cost Ascertainment:
One of the important aspects of cost accounting is cost finding or cost ascertainment. It means ascertaining the cost of a product or a service or a job. It deals with:
(a) The collection and analysis of expenses;
(b) The measurement of production of the different products at the different stages of manufacture.
(c) The linking up of production with expenses.
The collection and analysis of expenses is done by adopting certain systems of costing such as historical cost, estimated cost and standard cost.
The measurement of production at different stages is made by adopting certain methods or types of costing such as single or output costing, job costing, contract costing. process costing, etc ‘the methods or types of costing imply different procedures used in the measurement of production. The linking-up of production with the analysed expenses is done by adopting certain techniques of costing such as absorption costing, marginal costing, standard costing, direct costing, etc. Thus all these three i.e. the systems, methods and techniques are used simultaneously.
(ii) Cost Accounting :
Cost accounting is the process of accounting for costs. With this, principles, methods and techniques of accounting and cost have been applied in determining costs and in the analysis of savings and / or diarrhea compared to previous experiences or standards.
It starts with the recording of the expenditure and ends with preparing for statistical data.
It uses double entry book keeping in recording expenses and uses also it as a basis f cost ascertainment, Thus cost accounting is a mechanism for cost ascertainment and cost control and cost can be ascertained by following the system of historical cost, estimated cost or standard cost
(iii) Cost Presentation :
Cost presentation refers to the reporting of cost data to the various levels of management to help them in their managerial decisions. It involves the presentation of cost data to the right personnel at the right nine in the right form.
(iv) Cost Control :
Cost control means the guidance and regulation of actual cost of operating, an undertaking It aims at guiding the actuals towards the line of targets. 1t regulates the actuals if they deviate or vary from the targets. This guidance and regulation is done by an executive action. Thus cost can be controlled by standard cost, budgetary management, systematic presentation and reporting of cost information.
(v) Cost Audit :
Cost audit is the verification of the correctness of the cost accounts. It is a check on the adherence of the cost accounting plan. it ascertains the efficiency of the system of cost ascertainment. It also cheeks whether the particular costs was ascertained on the normal and reasonable lines. it sees whether the routine process of costing and cost accounting has been carried out. Limitations of Cost Accounting:
Following are the limitations of cost accounting.
1. Lack of Uniform procedure :
There are different procedures for ascertaining costs. Thus costs of a product determined by different procedures will be different.
However, this limitation can be avoided by adapting the procedure to the needs of the organisation and such procedure should be constantly updated according to the changing situations.
2. Flexibility in conventions and estimates :
Cost accounting classifies costs into different elements, issues of materials at different prices, apportions overheads, allocates joint costs, divides overheads into fixed and variable, etc. basing on diii‘erent conventions and estimates which are very often arbitrary. As a result determination of cost may not be correct.
However, this shortcoming can be overcome by introducing a sound costing system and by clearly defining cost centres, cost units and responsibility centres.
3. Expensive System.
Introduction and functioning, of an elaborate costing system is expensive and it is not suitable to small organisations.
This limitation can be overcome by introducing a flexible costing system suitable to serve the needs of an Organisation big or small and expenses can be reduced accordingly.
4. Unhelpful in Inflationary situation .
Cost accounting fails in inflationary situation because it provides futuristic data based on the current situations.
5. Cost data for a specific purpose .
Cost accounting provides cost data for a definite purpose. Such cost information cannot be applied to other purposes without suitably adjusting to the changing situations and purposes.
6. Arbitrary Nature:
Many of the costing procedures are arbitrary in nature. However, such procedures can be rationalised by constant research and analysis.