What is often called cost accounting serves two fairly distinct purposes. Using information prepared for one purpose for the other purpose can lead to incorrect decisions. Two illustrations will suffice. Your accountants report that the average cost per unit of a product produced this july is $4, while or july last year the cost was $4.50. Does this mean that production has been more efficient this year than last? Not necessarily. In another company, accountants report that the average cost of producing a subassembly is $15 per unit, while the purchasing department reports that the identical subassembly can be purchased from a subcontractor for $11 per unit. Does this mean that the subassembly should be purchased from the subcontractor rather than produced internally? Not necessarily. Both cases illustrate situations in which information produced for one purpose might be used inappropriately for another purpose.
Domain of Cost Accounting. The two distinct purposes of cost accounting are sometimes called cost finding and management accounting. Cost finding was originally the sole interest of cost accounting. Its purpose is to calculate the average cost per unit of products produced by a manufacturer. The accounting rules for determining the average cost per unit are established to facilitate preparation of income statements and balance sheets. Generally accepted accounting principles require that inventories be reported on the basis of their cost. When the units are sold, they are reported in the income statement as cost of goods sold at this same cost. In a manufacturing organization, cost must be determined by an averaging process which satisfies generally accepted accounting principles.
Management accounting is the newer interest of cost accounting. Its purpose is to provide managers with information which aids decision making. There are no generally accepted principles which specify how management accounting information is to be reported. While systems such as direct costing and standard costing exist in management accounting, each accounting report should be tailored to the needs of the decision and the decision maker. The most effective systems result when the manager- decision maker and the accountant work together until the accountant understands the decision to be made and the manager understands the source of the information that the accountant will report.