Cost accounting is an accounting process that primarily aims to capture a company’s costs of production by ascertaining the input costs at each step of production as well as fixed cost such as the depreciation of capital equipment. The result obtained aids the company’s management in decision making and thus measuring financial performance.
Differentiate between Financial Accounting and Cost Accounting
| Basis of Distinction | Financial Accounting | Cost Accounting |
| Objective | Objective is to determine the profit of the organization | Objective is to determine the cost of a product/service |
| Type of user | Meant for external users | Meant for internal users |
| Measure | Uses accounting numbers | Along with accounting numbers, it uses non-financial measures |
| Period | Periodicity of financial accounting is fixed. i.e half yearly, quarterly | Periodicity of cost accounting depends on the need of the organization |
| Usage | Uses only actual costs and revenues | Along with actual costs and revenue cost accounting uses national cost and revenues |
| Preparation | It is not prepared from cost accounting | It is prepared from financial accounting |
Factor considered before installing a costing system
An Organization must plan and implement a costing system in accordance with the requirements of the management. Some of the factors that should be considered before installing the cost accounting system are:
- – Objective and expectations of the management for installing the system should be identified. The simplicity or complexity of the system depends on the objectives of the management.
- – Clear knowledge of the nature of the business, its technical aspects, products, process flow, methods and stages of production.
- – Study of the organization structure of its departments or division to determine the scope of responsibilities of the various executives/head of department/division.
- – All the relevant parties/staff involved in the decision-making process should be engaged right from the start until the date of delivery of the system.
- – Details of the cost records should be carefully worked. Also the degree of accuracy of the data to be supplied by the system should also be determined.
- – Costing system to be installed should be easy to understand and simple to operate.
- – All types of costs should be standardized, consistent and preferably automated with minimum clerical intervention.
- – Need to have regular reconciliation of costs and financial accounts if they are maintained separately.
