Objectives of Cost Accounting

Cost accounting is not an end in itself — it exists to serve the information needs of management. Its main objectives are the following.

1. Ascertainment of cost. The first and most basic objective is to find out the cost of each product, job, process or service — the total cost as well as the cost per unit — and to break that cost down into its elements (material, labour and expenses).
2. Cost control. Once costs are known, cost accounting provides the tools (such as standard costing and budgetary control) to keep actual costs within pre-decided limits, by comparing actual costs against standards or budgets and investigating the differences.
3. Cost reduction. Beyond merely keeping costs within limits, cost accounting helps to find genuine, permanent reductions in the cost of a product or service without lowering its quality — for example, by eliminating waste, improving methods or negotiating better material prices.
4. Ascertainment of profitability. By computing the cost and revenue of each product, job or department separately, cost accounting shows which products or activities are profitable and which are not, information the single profit figure of the financial accounts cannot give.
5. Fixation of selling price. A reliable cost figure is the starting point for setting a selling price — the price must at least cover cost, and cost accounting supplies the cost on which a suitable profit margin can be added, and which can guide pricing during a slump or for a special order.
6. Assisting management in decision-making. Cost accounting supplies the cost data needed for decisions such as whether to make a component or buy it from outside, whether to accept a special order at a lower price, whether to continue or drop a product line, and how to use limited resources most profitably. …