Addressing Negative Pressure on Profitability
Added on 2019-09-30
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BLOG: COST ACCOUNTINGWHAT IS ACCOUNTING COST?
WHAT IS ACCOUNTING COST?24th June, 2019Cost accounting refers to a branch of accounting and it is used by business organisations forages. This particular branch of accounting is the best way for every kind of non-profit and profitmaking organisations to track their costs and the activities for which such costs are incurred bythem. Cost accounting uses to deal with the evaluation of the cost of a product or service acompany offered. It computes the cost of a product or service by considering every factorcontributing to the process of producing such product or service which include the factor relatedto manufacturing or production and administrative. Cost accounting system is aimed to help acompany’s management to fix up the final price of a product or service it produces and to controlthe cost associated with the production of such product or service. Moreover, it pinpoints everysort of wastages, defects, and leakages during a company’s manufacturing process as well as itsmarketing processes. Cost accounting is a highly significant and advantageous companion oftraditional financial accounting system. This accounting system involves the establishment ofactual cost or standard cost of operations, different types of budgets along with classification,recording, and allocation of business related expenditure. Origin of Cost AccountingBefore the emergence of industrial revolution, business organisations were small in size and theyare characterised by simple exchanges between organizations and individuals. In that period oftime, accurate bookkeeping was needed but cost accounting was not so much vital. Over theyears businesses become complex due to their distinct operating activities which evoked the needfor cost accounting. The industrial revolution age has resulted in the development of large scaleorganisations and businesses and these organisations were much dynamic and complex thanprevious. Such dynamic and complex nature of businesses instigated the invention of a newbrand of accounting which is called cost accounting. So the concept of cost accountingoriginated and evolved due to the industrial revolution to help businessmen to track their
business related expenses and costs by keeping a record for the same. Prior to the golden era ofindustrialisation, costs and expenses of a business are categorised as variable costs which includecost of material, labour, overhead and other variable costs.However, at the time when industrialisation came into existence, businesses had a number of‘fixed costs’ that are not directly associated with the manufacturing or production of products orservices. These fixed costs consist of expenses related to rent, storage costs, depreciation,insurance cost and more. As steel industry, railroads and some other large industries weredeveloped, the understanding of the fixed costs of businesses became vital. Allocation of thesefixed costs became significant to the business owners and managers for their business orienteddecision making, product development, and pricing. Such increasing importance ofunderstanding fixed costs, allocating the same in an appropriate manner, and considering thesecost elements in decision making have originated the concept of modern cost accounting.Evolution of Cost AccountingIn today’s world, the business environment becomes very dynamic as well as complex. Acompany must have the ability to navigate the complex business factors that arise from theexternal business environment as the threat of new entrants, competition, uncertainty, risks, andsome other uncontrollable external factors. All these external business environment factors createcomplexities and difficulties for companies to continue their business operations smoothly and toexpand their business. Before the industrial revolution, when the organisations were small in sizeand scale, the external business environment was not that much complex as it is now. In order toconduct business operation successfully by mitigating all the complex external factorseffectively, the modern business organisations require lots of processes and input which invokedthe idea of cost accounting to come into existence. Over the times and as per the increasing complexities in business activities, only conventionalfinancial accounting becomes insufficient for effective management of large and medium scaleorganisations. The need for improving the management system and business activities of largeand medium size companies has provoked the evolution of cost accounting system. In the pastfew decades, this newly evolved branch of accounting has come through rapid growth and
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