Nature & Scope of Cost Accounting


After studying this chapter, you should be able to understand and explain the following:

  • Meaning of cost accounting and its relationship with other branches of accounting, i.e.

financial accounting and management accounting. )% Scope of cost accounting.

;%. Objectives and advantages of cost accounting.

  • Objections against cost accounting.
  • Installation of a costing system.


Cost accounting is a branch of accounting and has been developed due to limitations of financial accounting. Financial accounting is primarily concerned with record keeping directed towards the preparation of Profit and Loss Account and Balance Sheet. It provides information regarding the profit and loss that the business enterprise is making and also its financial position on a particular date. The information concerning the business enterprise is helpful to the management to control in a general way the major functions of a business viz., finance, administration, production and distribution but details regarding operating efficiency of these divisions are lacking. In fact, the development in the field of cost accounting is so quick and field covered by it are expanding so much in magnitude that it becomes difficult for the management to lay down management policies, to guide the management decisions or evaluate operating management performance with the information provided by financial accounting.


Financial accounting is defined by AICPA as ” the art of recording, classing and summarizing inn-a significant manner and in terms of money transactions and events which are, in part at least, of a financial character, and interpreting the results thereof’. Financial accounting provides information to business managers and also to outside parties including shareholders, suppliers, customers, employees, government departments and the general public. Such information is expressed in the following financial statements.

(a)   Profit and Loss Account — showing the net profit or loss during the period.

(b)  Balance Sheet — showing the financial position of the firm at a point of time.

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