To have an understanding on what a cost accountant does, we have to understand some relevant aspects which are explained below.
Motive of a businessProfit is the basic motive for any business. Organisations work towards achieving their objectives in an efficient manner. Efficiency in earning profits implies maximising profits with the least possible use of resources.
Earning More ProfitsConsider a company manufacturing a product at Rs 150 per piece and selling it at Rs 230 per piece. It is making a profit of Rs 80 a piece. It is at present selling 10,000 units and thereby making a profit of Rs 8,00,000.
The company is now wanting to earn greater profits. It has set itself a target of Rs. 10,00,000. It has identified that it cannot immediately increase the quantity of sale.
By increasing Sale PriceFor achieving its objective the company may increase the selling price to Rs 250 and earn a profit of Rs 100 a piece. The company would be able to earn the targeted profit of Rs. 10,00,000, if it can maintain the quantity of sales at its earlier figure of 10,000.
However in this competitive market, there is no guarantee that the sales would not go down if the price is increased. The basic economic principle says demand decreases as price increases.
By increasing the price the company is meddling with factors relating to the external environment which inevitably may have other implications also.
By controlling costsThe company can target achieving the same amount of profit by using an alternative route i.e. cost control.
If the company is able to manufacture the same product (at the same or even better quality) at a lesser cost say Rs. 130 a piece, the company would be able to reach the targeted profit figure without having to lose customers as it is only handling the internal factors i.e. factors in its own hands.
If by controlling cost the same product can be manufactured at the same quality or even better quality at Rs 130 a piece, the company would be making a profit of Rs. 100 per piece at the same selling price of Rs. 230 and thereby reach the targeted profit figure of Rs. 10,00,000 by selling the same quantity of 10,000 units as earlier. If it is able to achieve better quality at that price, the quantity of sale may also exceed the present figure, thereby generating profit in excess of the target.
Controlling/reducing costsThis process of controlling/reducing costs involves using the accounting and quantitative techniques to take decisions which would ultimately result in cost reduction.
Wastages in raw materials used, labour, less productive manufacturing methodologies etc., will be identified and corrective steps taken to benefit the organization.
Objective with which a cost accountant works
This is what a cost accountant is supposed to do. This will also benefit the society at large by conserving precious resources used in manufacturing..
In such industries as the governments feel appropriate, maintenance of cost accounting records is made mandatory and all such organisations have to get their records certified by a practicing cost accountant.
This is generally done in industries which use precious natural resources whose conservative and efficient use is a requirement for the society as a whole.