INTRODUCTION TO COST ACCOUNTING

Purpose The main object of this lesson is to introduce the learner to
cost accounting; uses of cost information; cost concepts and the
differences between cost accounting and financial accounting Specific
Objectives By the end of the lesson the learner should:

• Define cost accounting
• Understand the range of information that could be supplied by the
  cost accounting system.
• Know the relationships of cost accounting to management accounting
  and financial accounting
• Understand how raw data are transformed into information 1.1 Definition of and Scope of Cost Accounting

Cost scouting (commonly) termed “costing” may be defined as: „The
establishment of budgets, standard costs and actual costs of operations,
activities or products; and the analysis of variances, profitability, or
the social use of funds’ The accounting system of any organization is
the foundation of the internal financial information system. Management
needs a variety of information to plan, to control and to make
decisions. Information regarding the financial aspects of performance is
provided by the costing system.

An important part of the management task is to ensure that operations,
departments, processes and costs
are under control and that the organization and its constituent parts
are working efficiently towards agreed objectives. Although there are
numerous other control systems within an organization, for examples
production control, quality control, inventory control, the costing
system is the key financial control system and monitors and the results
of all activities and all other control systems. The detailed analysis
and location of all expenditures, the calculation of job and product
costs, the analysis of losses and scrap, the monitoring of labour and
departmental efficiency and outputs of the costing system provide a
sound basis of information for financial control. Cost accounting and
financial accounting

Financial accounting can be defined as: ‘/The classification and
recording of the monetary transactions of an activity in accordance with
established concepts, principles, accounting standards and legal
requirements and their presentation, by means of profit and loss
account, balance sheets and cash flow statements, during and at the end
of accounting period’ /

Financial accounting originated to fulfil the stewardship function of
businesses and this is still an
important feature. Most of the external financial aspects of the
organization, e.g., dealing with accounts payable and receivables,
preparation of final accounts etc., are dealt with by the financial
accounting system. Of course internal information is also prepared, but
in general it can be said that financial accounting presents a broader,
more overall view of the organization with primary emphasis upon
classification according to type of transaction rather than the cost and
management accounting emphasis on the function, activities, products and
processes and on internal planning and control information