Question

ting system that simply records costs for the purpose of fixing sale prices has

accomplished only a small part of its mission”. In the light of this statement, explain what

other functions does costing system perform? Also differentiate between financial

accounting and cost accounting.​

Answer 1

Answer:

2. Necessity for Cost Accounting System:

A company having a proper cost accounting system will help the management in the following ways:

1. The analysis of profitability of individual products, services or jobs.

2. The analysis of profitability of different departments or operations.

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3. The analysis of cost behaviour of various items of expenditure in the organization. This will help in future cost estimation with reasonable accuracies.

4. It locates differences between actual results and expected results. Such differences can be also traced to the individual cost centres with the efficient cost system.

5. It will assist in setting the prices so as to cover costs and generate an acceptable level of profit.

6. The effect on profits of increase or decrease in output or shutdown of a product line or department can be analyzed with by adoption of efficient Cost Accounting System.

7. The costing records serve to analyze the final accounts of a company i.e., the manufacturing, trading and profit and loss accounts, in such a way as to give a detailed explanation of the sources of profit or loss.

8. Cost Accounting data generally serves as a base to which the tools and techniques of Management Accounting can be applied to make it more purposeful and management oriented.

9. The cost ascertainment, allocation, distribution can be efficiently made under efficient costing system.

10. Cost records are the base for the Management Information Systems.

11. The Cost System generates regular performance statements which management need for control purposes.

12. Cost Accounting System is not only applicable to manufacturing organizations or functions but also extended to service organizations and functions.

13. Cost comparisons between different departments, machines and alternative processes help management to maintain maximum efficiency is possible with the adoption of efficient Costing System.

14. The costing information will help in making reliable estimates and will also help in submission of tenders.

15. Costing checks recklessness and avoids occurrence of mistakes.

16. It provides invaluable aid to management in performing its functions of planning, evaluation of performance, control and decision making.

17. It facilitates delegation of responsibility for important tasks and rating of employees.

18. It enables to distinguish profitable and non-profitable activities.

19. It helps in determination of break-even point i.e. the level of activity where the firm reaches no profit no loss situation.

20. It aids in determining and enhancing levels of efficiency and eliminates wastage of men, materials, machines and money. All sorts of wastages are also minimized.

21. The costing information will find a way out in periods of trade depression and competition.

22. It provides data for preparation of periodical Profit and Loss Account.

23. It facilitates the assessment of Excise duty, Customs duty, Income-tax.

24. It helps the government in formulation of policies regarding industry, import, export, taxation, etc.

25. It helps the government in fixation of administered prices, tariff protection, wage level fixation etc.

26. The Costing System will aim at increase in operational efficiency and cost reduction, which helps the consumers in getting reduced prices.