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Cost Accounting: Its role and ethical considerations

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Introduction

Cost Accounting: Its role and ethical consideration Introduction: Accounting is the process of identifying, measuring, and communicating economic information about an entity for the purpose of making decisions and informed judgements. The major areas of within the accounting are: Financial Accounting, Managerial Accounting/Cost Accounting and Auditing- Public Accounting Managerial accounting is concerned with the use of economic and financial information to plan and control the activities of an entity and to support the management in planning and decision-making process. Cost accounting is the subset of managerial accounting and it helps management in determination and accumulation of product, process or service cost. Role of Cost Accounting: Increased competition and uncertain business conditions have put significant pressure on corporate management to make informed business decisions and maximize their company's financial performance. In response to this pressure, a range of management accounting tools and techniques has emerged. One of the most important tools that a management can use is - Cost Accounting. ...read more.

Middle

standards and a commitment to the proper reporting and disclosure of financial information needs to be constantly reinforced within the area of accounting. Absorption and Variable Costing: Absorption Costing: All costs (fixed and variable) of production are product costs. Which means under absorption costing, both variable and fixed manufacturing costs are included as a part of the cost of the product manufactured. Variable Costing: Only those costs of production that vary directly with activity (variable costs) are treated as product costs. Under variable costing, only the variable manufacturing costs are included as a part of the cost of the product manufactured. The fixed manufacturing costs are treated as an expense of the period in which they are incurred. Cost classification under absorption and variable costing: Absorption Costing Variable Costing Product Cost: Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead Product Cost: Direct materials Direct labor Variable manufacturing overhead Period Costs Selling and administrative costs Period Costs Fixed manufacturing overhead Selling and administrative costs The basic difference between absorption and variable costing relates to the handling of fixed manufacturing overhead. ...read more.

Conclusion

Supporters of variable costing believe that fixed manufacturing costs are not really the cost of any particular unit of product. If a unit is made or not, the total fixed manufacturing costs will be exactly the same. These fixed costs are incurred to have the capacity to make products during a particular period and should be charged against that period as period costs according to the matching principle. Conclusion: Cost accounting is an important tool that can help management in making informed decision. Though it is not legally required but still it is necessary to run an entity effectively. Cost accounting is turned toward the future. There are different methods of costing in Cost Accounting: Absorption costing and Variable costing. Both have some merits over the other. An entity can use both of them for different uses. Absorption costing can be used for external reporting, managers need to review the effect of their decision on financial reporting to outsiders whereas Variable costing can be used by managers to review the effect of management decisions on production, costs and profits. ...read more.

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