annum. In simple words, cost accounting is used to find out how the cost is concluded. Cost accounting is beneficial to keep records of accounts. This helps the management to plan and execute necessary measures, if any, for cost reduction as well as maintain various costs of production and similar things.
Types of cost accounting
One of the major parts of cost accounting is the standard accounting. It focuses on the cost of manufacturing such as manufacturing expenses, direct material as well as direct manual labour. Standard accounting involves the means of allocating the estimated cost to the products rather than keeping the cost of the products at the original price. Thus, goods and their selling cost reveal the standard cost and not the original cost. This is the standardisation of cost.
Though, there is the difference between both the costs but the producers are still required to pay the original/actual cost. And this difference is known as variances.
Both cost variance analysis, as well as standard costs, is crucial management tools. When the actual cost of the production is more than the standard cost, then it becomes unfavourable variance. But when the standard cost is more than the actual cost, then it becomes favourable variance. So, when there is favourable variance company enjoys a big profit.
Purpose of standard costing
As mentioned earlier, standard costing is imperative for management. Apart from that, it holds several other purposes:
- Enhanced cost control: with the help of standard costing the company enjoys a greater cost control. This is done by assigning different standards to various costs and then accentuating variance.
- Successful planning of management: standard cost accounting helps in managerial planning. It facilitates the management in understanding the cost to profit ratio. When there is a rise in the actual cost, the management understands that they need to trim down the cost and make plans accordingly.
- Efficient stock management: with the help of this management can put the value to stock in a better way and more accurately.
- Expenditure saving in record keeping: sometimes, people think that standard cost accounting is more financially troublesome, but in reality, this is not the case. Instead, this method is extremely helpful.
Major role of costing in decision making of the management
Costing has many advantages when it is about the managerial decision making in an organization:
- Pricing verdict
- Company’s performance
- Decision to sell or develop further
- Financial reporting
Thus, standard costing, as well as variance analysis, plays the major role in an organization’s management.
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