General Principles of Cost Accounting
The following are the main principles of Cost Accounting:
1. Cause-effect relationship- Cause-effect relationship should be established for each item of cost. Each item of cost should be related to its cause as minutely as possible and the effect of the same on the various departments should be ascertained. A cost should be shared only by those units which pass through the departments for which such cost has been incurred.
2. Charge of cost only after its incurrence- Unit cost should include only those costs which have been actually. incurred. For example unit cost should not be charged with selling cost while it is still in factory.
3. Past costs should not form part of future costs- Past costs (which could not be recovered in past) should not be recovered from future costs as it will not only affect the true results of future period but will also distort other statements.
4. Exclusion of abnormal costs from cost accounts-All costs incurred because of abnormal reasons (like theft, negligence) should not be taken into consideration while computing the unit cost. If done so, it will distort the cost figures and mislead management resulting in wrong decisions.
5. Principle of double entry should be followed preferably- To lessen the chances of any mistake or error, cost ledgers and cost control accounts, as far as possible, shouldnbe maintained on double entry principles. This will ensure the correctness of cost sheets and cost statements whichnare prepared for cost ascertainment and cost control.
Nature of Cost Accounting
By nature of cost accounting we mean that is cost accounting a science, an art or both? In this context it can be said that cost accounting is both an art and a science and it becomes clearer from the following discussion –
Cost Accounting as a Science – cost accounting is a science because like other sciences it too has its own principles, procedures and techniques knowledge about which can be gotten through study and training. For a cost accountant to be able to carry out his duties well needs to have a proper knowledge of cost accounting. Actually the knowledge of cost accountant should not remain confined to cost accounting only instead he should also know in depth about Production Control, Operations Research and Linear Programming related to cost accounting.
Cost Accounting as an Art – Cost accounting is also an art because its Standard Costing and Marginal Costing etc. are such techniques with whose help a costing accountant can determine that how investments can be controlled, should a new plant replace the old plant or no, the production of a specific commodity, which is bringing in loss, be continued or stopped, etc. in this way with the use of techniques of cost accounting important decisions related to increasing the profit earning capacity of an organization can be taken at the right time.
