Essential Details You Need to Know About Cost Accounting

True Tamplin

Written by True Tamplin, BSc, CEPF®
Updated on August 27, 2021

Cost accounting is a method of accounting that helps to calculate the cost of different functions of a company, such as production, fixed price along with depreciation of capital equipment. At first, it measures and records these costs individually and then compares the input outcome with the actual result to assist the management of a company for measuring their financial performance.
Cost accounting was developed during the Industrial Revolution when the economics of industrial supply and demand forced manufacturers began keeping a track on their business functions for making decisions on whether or not to decrease the price of their overstocked goods or reduce the production.

Goals of Cost Accounting

The main target of cost accounting are as follows:

  • To determine the costs for each object
  • To fix the selling prices
  • To control the costs by checking the expenses made by a company against the standards that are already set
  • To reduce the cost of production and not compromise with the quality
  • To determine the closing inventory
  • To assist the management of a company regarding the inefficiencies of workers and to optimise the use of resources of an organisation

Different Types of Cost Accounting

Before examining different costs, it is necessary that one should understand the different types of expenses.

Fixed Costs:

Fixed costs are referred to as those which remain the same despite changes in production, process or projects. For example, in the manufacturing industry, even if there are changes in production, the salaries of all employees will remain the same.

Variable Costs:

The costs that vary with every change in process, production and projects are known as variable costs. For example, in a company that manufactures cars and their parts, the material and labour cost changes according to the production of vehicles and different components.

Sunk Cost:

Some costs that are sustained and cannot be improved are referred to as sunken costs. For example, in a car manufacturing unit, the sunken cost is referred to as the machinery costs that cannot be recovered.

Opportunity Cost:

The cost that is incurred for selecting one option over the other is known as opportunity cost. It means that one must always consider the profit of the non-production product, which almost all the companies forgo.

Different Techniques of Cost Accounting

Now that you know the types of cost accounting, you will be able to understand the various cost accounting techniques that will help in making marginal decisions.

Marginal Cost:

In this technique, the management decides the number of units to be produced. This technique only includes the costs of additional units and excludes all fixed fees because they do not differ with the changes in production.

Standard Costing:

It is a costing that compares the quotation of the costs gained from the cost of products, process and projects that are determined from before.

Direct Costing:

This technique is referred to all the costs that are charged for a particular product or project, and the indirect damage is shown as profit and loss.

Historical Cost:

It compares all the costs incurred before the accomplishment of the process.

Absorption Costing:

It is referred to as a full costing method. In this, a costing technique that charges all the costs to products, projects and processes.

Cost Accounting Systems:

Various companies use two central cost accounting systems:

  1. Job order costing:

This is a type of costing system, which puts collaborated manufacturing costs separately for every single task. It is suitable for specific companies that produce unique products and services.

  1. Process costing:

This accounting system puts together the cost of manufacturing individually for each process. It is appropriate for those organisations that are engaged in process production, which involves different departments and cost flow within various departments.

How Can an Organisation Incorporate an Effective Cost Accounting System?

Listed below are some steps which are used by an organisation for an adequate cost accounting system:
Appraisal and selection:
Determine the scope of costs to select a suitable accounting system for tracking, processing, and understanding them. If a company is operating in a highly specialised industry, then the order costing will be appropriate because it allows you to control costs related to jobs performed by a firm. This helps companies to stick to their estimated values. Whereas, if a company’s business function is repetitive, then process and standard costing will be suitable.
Testing and confirmation:
It is mandatory to test a chosen accounting system to check its ability to perform an allotted reporting task along with detecting and eliminating all flaws, which can affect the accuracy of a cost accounting system. Scrutinising its software applications and hardware components will help to determine all features of an accounting system.
Training and Changeover:
Training the employees to use an accounting system is necessary as they will get familiar with the functions and techniques of this system. Moreover, it helps in building confidence among employees and minimises the errors during the use of an accounting system.

Various Costing Methods Used in Different Types of Businesses

  • Job costing is used primarily in advertising businesses.
  • Contract costing incorporated in construction businesses.
  • Unit costing is used in mining.
  • Batch costing is incorporated in manufacturing businesses.
  • Operating costing is implemented in the functions of hospitals.

Therefore, cost accounting is a process that helps in determining the costs of goods and services. It records, classifies, allocates different expenditures and makes financial statements. It deals with various components of business costs such as job, services, process, order, etc., wherever required and involves cost production, cost selling and cost distribution.
The cost accounting system is helpful to keep track of all each cost of business functions. Companies choose the cost accounting system depending on their business functions. It has been found that by using an appropriate job accounting system, almost every organisation can control the cash flow in their business functions. Hence, it is necessary for every organisation to choose a suitable method for cost accounting, and train their employees to use it as it will help them to become acquainted with the features of it.

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