Cost Accounting: Its role and ethical considerations

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Cost Accounting: Its role and ethical considerations


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. Cost accounting helps

management in making strategic decisions by identifying an

organization?s comparative strengths and weaknesses and a better ways

to use, improve or eliminate them. Cost information is used for many

different purposes:

· Performance measurement;

· Cost reduction and control;

· Determination of reimbursement and fee or price setting;

· Program authorization, modification, and discontinuation decisions;


· Decisions to contract out work or make other changes in the methods

of production or delivery of services.

Cost accounting provides various tools for example: Cost-benefit

analysis, break-even analysis,

and CVP to help management in making decisions.

Role of Ethics in Cost Accounting

Webster's Dictionary defines ethics as "...the principles of conduct

governing an individual or a profession: the discipline dealing with

what is good or bad or right and wrong, or with moral duty and

obligation; a particular theory or system of moral values". Ethics are

very important in any field. In cost accounting also ethics play an

important role. Ethical situations can easily arise in any business

setting when money is involved. . The whole Enron saga was the result


... middle of paper ...

...g 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.


Absorption, Variable, and Throughput Costing. Retrieved on December15,

2004 from

Hilton, Ronald W: Cost Management: Strategies for Business Decisions,

Second Edition:

Marshall: Accounting, What the Numbers Mean, Sixth Edition: 3-8

Turner, Robert M: Ethics and professionalism: the CPA in industry,

April1990. Retrieved on December15, 2004 from

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