In the modern business world, profitability growth and survival are considered as the basic economic goals of any business organization. Among these, profitability is the key goal because growth and survival are incidental to the profitability. No enterprise can survive if it does not prove profitable in the long run. Similarly, there is case for growth only when the existing and the proposed projects seem profitable. Without undergoing into certain technical controversies about the terms cost and profit it can plainly be out that profit determination is dependent on cost. From the revenue and cost data expressed in monetary value, the profit is determined as under:
Revenue – Cost = Profit
Thus, profit is the positive difference of revenue and cost. Profit is a derived rather than a direct figure. The margin of profit can be increased by the maximization of revenue or reduction of cost or maximization of revenue along with the reduction of the cost.
The revenue can be maximized either by charging the higher price or by increasing the volume of sale. In the capitalist economy, it is not possible to charge price due to existence of keen market competition. Moreover, the existence of cut throat competition makes it extremely difficult to increase the volume of sales. Similarly in a controlled economy, the prices are regulated by the government agencies and so it is not possible to increase the revenue economy by charging the higher prices. Thus, one alternatives of maximization, viz. increase in revenue is curbed in capitalist as well as controlled economy. The other alternative to the goal of maximization of profit is the cost reduction. The cost reduction can be managed effectively only when the costs are clearly defined and identified and are ascertained on the basis of some units of production. Due to such specific need of the cost studies, cost accounting has evolved as an off spring of the traditional accounting system since the First World War.
In fact, the traditional financial accounting system filed to fulfill the need of the professional management which gave away to the development of cost accounting. Cost accounting provides the data to the management required for the following key purposes:
1) Planning and policy decision for non-routine functions
2) Planning and controlling routine operations
3) Valuation of inventory and determination of income
In modern times, the development of the science of cost accounting is sufficient enough to treat it as a separate branch of science of a accountancy. The specialized cost and accounting institutes cater training the professional cost accountants to cater to the needs of the business world. In India, the institute of Cost and Works Accountants (ICWA), Calcutta is a professional body striving for preparing the professional cost accountants and development and dissemination of the science of cost accounting. Practically such institutes work in all the progressive countries of the world.
Certain important terms are defined as under:
Cost: Cost may be defined as resources sacrificed or foregone to achieve specific objective. Cost signifies an expenditure or monetary outlay (actual or committed) to secure some benefits are derived (and sometimes failed to derive any benefits) are recognized and recorded, it is known as expired cost or expense e.g. payment of wages to worker. When the cost is recorded before the sufficient benefits are derived, it is known as deferred cost, e.g. purchase of a machine with a longer operating life. The deferred cost becomes expired cost in course of time.
Costing: Costing is a technique and a process of determining the cost of doing something e.g. the cost of manufacturing an article rendering a service or performing a function.
Cost objective: The objects are always activities. The article manufactured service rendered or function performed is known as object of costing. Cost objective is defined as any activity which a separate measurement of cost is desired.
Cost accounting: Cost accounting is a specialized branch of accounting which deals with classification, recording allocation and control of costs. It is a formal mechanism which scans out the accounting information into systematic cost data required by the management for various purposes. Its spread of activities ranges from the routine collection of costs for statements and budgets to the specialized cost studies required for certain specific purposes.
Cost unit: The cost units are the bases in terms if which the costs are ascertained and expressed. The important cost units are quantity of the product e.g. number of fans, tonnes of coal, bales of cotton etc; a group identical products or batch; a unit of service e.g. power consumption in units, number of beds in hospitals passenger mile in transport services etc a job or contract.