Its goal is to advise the management on the most appropriate course of action based on the cost intermediate accounting mcgraw hill pdf and capability. Cost accounting provides the detailed cost information that management needs to control current operations and plan for the future. Since managers are making decisions only for their own organization, there is no need for the information to be comparable to similar information from other organizations.
Instead, information must be relevant for a particular environment. All types of businesses, whether service, manufacturing or trading, require cost accounting to track their activities. Money was spent on labor, raw materials, power to run a factory, etc. Managers could simply total the variable costs for a product and use this as a rough guide for decision-making processes. Some costs tend to remain the same even during busy periods, unlike variable costs, which rise and fall with volume of work. Examples of fixed costs include the depreciation of plant and equipment, and the cost of departments such as maintenance, tooling, production control, purchasing, quality control, storage and handling, plant supervision and engineering.
In the early nineteenth century, these costs were of little importance to most businesses. However, with the growth of railroads, steel and large scale manufacturing, by the late nineteenth century these costs were often more important than the variable cost of a product, and allocating them to a broad range of products led to bad decision making. Managers must understand fixed costs in order to make decisions about products and pricing. For example: A company produced railway coaches and had only one product. 300, managers knew they couldn’t sell below that price without losing money on each coach. 300 became a contribution to the fixed costs of the company.
Financial accounting aims at finding out results of accounting year in the form of Profit and Loss Account and Balance Sheet. Financial accounting reports the results and position of business to government, creditors, investors, and external parties. Cost Accounting is an internal reporting system for an organization’s own management for decision making. In financial accounting, cost classification is based on type of transactions, e. In cost accounting, classification is basically on the basis of functions, activities, products, process and on internal planning and control and information needs of the organization. Classification of cost means, the grouping of costs according to their common characteristics. Direct costs are assigned to Cost Object.
Indirect costs are allocated or apportioned to cost objects. By Behavior: fixed, variable, semi-variable. Costs are classified according to their behavior in relation to change in relation to production volume within given period of time. Fixed Costs remain fixed irrespective of changes in the production volume in given period of time. Variable costs change according to volume of production. Semi-variable costs are partly fixed and partly variable.