Question

“A costing systen that simply records costs for the purpose of fixing sale prices has
accomplish only a small part of its mission". In the light of this statement,explain what
other functions does costing system perform? Also diffcrentiate between financial
accounting and cost accounting.​

Answer 1

A costing system is designed to monitor the costs incurred by a business. The system is comprised of a set of forms, processes, controls, and reports that are designed to aggregate and report to management about revenues, costs, and profitability.

Cost Accounting aims at maintaining cost records of an organisation. Financial Accounting aims at maintaining all the financial data of an organisation.

Cost Accounting Records both historical and per-determined costs. Conversely, Financial Accounting records only historical costs.

Users of Cost Accounting is limited to internal management of the entity, whereas users of Financial Accounting are internal as well as external parties.

In cost, accounting stock is valued at cost while in financial accounting, the stock is valued at the lower of the two i.e. cost or net realisable value.

Cost Accounting is mandatory only for the organisation which is engaged in manufacturing and production activities. On the other hand, Financial Accounting is mandatory for all the organisations, as well as compliance with the provisions of Companies Act and Income Tax Act is also a must.

Cost Accounting information is reported periodically at frequent intervals, but financial accounting information is reported after the completion of the financial year i.e. generally one year.

Answer 2

An ideal costing system is one that achieves the goals of a costing system and gives enterprise all the benefits of costing.

• Other functions of the system include -

1. The cost accounting method should be in a position to implement  to the changing market circumstances themselves. Based on the company requirements it must be capable of expansion or contraction.
2. The cost accounting method must ensure consistency in terms of both cost ascertainment and cost data presentation. It would otherwise prove to be misleading.
3. The records to keep must facilitate comparison over a period of time. The past documents will serve as a guide for directing the future.
4. The cost of the costing system for the production must be lower. This must lead to an increase in benefit as matched with deployment expenses.

Difference -

1. Financial accounting shows income for the whole company as a whole, Whereas cost accounting for every product , process or operation indicates the benefit.

2. Financial accounting does not employ control methods, whereas control methods such as budgetary control are used in cost accounting.