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Cost Accounting – Meaning, History & Types
Table of Contents
Meaning
It is a form of managerial accounting. It aims to capture a company’s total cost of production. By assessing the variable costs of each step of production. As well as the fixed costs, like a lease expense.
Understanding the Cost Accounting
It is used by a company’s internal management team. To identify all the variable and fixed costs that are associated with the production process. It will first measure and also record these costs individually.
Then compare the input costs to output the results to aid in measuring the financial performance. Also making future business decisions. There are many types of costs that are involved in this type of accounting. Which are defined below as well.
The Types of Costs
Fixed Costs
Fixed Costs are costs that don’t change depending on the level of production. These are usually things like the mortgage or lease payment on a building. A piece of equipment that belittles at a fixed monthly rate. An increase or decrease in the production levels would cause no change in these costs.
Variable Costs
Variable Costs are costs that tied to a company’s level of production. For example, a floral shop provides a ramp-up of their floral arrangement inventory. Valentine’s Day will incur higher costs. When it purchases an increased number of flowers from the local nursery or garden center.
Operating Costs
Operating Costs are costs that are associated with the day-to-day operations of a business. These costs can be either fixed or changes depending on the unique situation.
Direct Costs
Direct Costs are Costs particularly related to producing a product. If a coffee roaster spends five hours roasting coffee. The direct costs of the finished product. That includes the labor hours of the roaster. And the cost of the coffee beans.
Indirect Costs
Indirect Costs are Costs that cannot be directly linked to a product. In the coffee roaster example, the energy cost to heat the roaster would be indirect. Because it is inexact and also difficult to trace to the individual products.
The Cost Accounting vs. Financial Accounting
While Cost Accounting is frequently used by the management within a company. To aid in the decision-making. Financial accounting is what the outside investors or creditors can typically see. Financial accounting presents a company’s financial position.
Also the performance to external sources through the financial statements. It includes information about its revenues, expenses, assets, and liabilities. Cost accounting can be most beneficial.
As a tool for management in budgeting. In setting up the cost control programs. It can improve the net margins for the company in the future.
One key difference between cost accounting and financial accounting is that. But in financial accounting, the cost is classified which is depending on the type of transaction. Cost accounting classifies the costs according to the information.
The needs of the management. Cost accounting, because is used as an internal tool by the management. It does not have to meet any specific standard like generally accepted accounting principles. That is GAAP and, as a result, changes in use from the company to the company. Or department to department.
Types
Standard Costing
Standard costing assigns standard costs. Rather than its actual costs. To its cost of goods that are sold COGS and inventory. The standard costs are based on the efficient use of labor and materials. To produce the good or service under the standard operating conditions.
They are essentially the budgeted amount. Even though standard costs are assigned to the goods. The company still has to pay the actual costs. Using the difference between the standard that is efficient cost. The actual cost incurred is called Variance Analysis.
If the variance analysis determines that the actual costs are higher than the expected ones. The variance is unfavorable. If it determines the actual costs that are lower than expected. The variance is favorable.
Two factors can contribute to a favorable or unfavorable variance. There is the cost of the input, like the cost of labor and materials. This is considered to be a rate variance. Additionally, there is the efficiency or quantity of the input that is used.
This is considered to be a volume variance. If, for example, XYZ company expected to produce 400 widgets in a period. But ended up producing 500 widgets. Then the cost of materials would be higher due to the total quantity produced.
The Activity-Based Costing
Activity-based costing that is ABC identifies the overhead costs from each department. Assigns them to the specific cost objects, like goods, or services. The ABC system of cost accounting is based on the activities.
Which is any event, unit of work, or task with a specific goal. Like setting up machines for production, designing products, distributing finished goods, or operating the machines. These activities are also considered to be cost drivers. They are the measures that are used as the basis for allocating the overhead costs.
Traditionally, overhead costs are assigned based on one generic measure, like machine hours. Under ABC, an activity analysis is performed where the appropriate measures are identified as the cost drivers.
As a result, ABC regularly to be much more accurate. It is helpful when it comes to managers reviewing the cost and profitability. Of their company’s specific services or products.
For example, the cost accountants using ABC that might pass out a survey to production line employees. Who will then account for the amount of time that they spend on different tasks?
The Lean Accounting
The main aim of lean accounting is to improve the financial management practices within an organization. Lean accounting is an extension of the philosophy of lean manufacturing and production. It has the stated intention of minimizing waste while making the best productivity.
For example, if an accounting department is able to cut down on the wasted time. The employees can focus that saved time more productively on the value-added tasks.
When using lean accounting, traditional costing methods are replaced by value-based pricing. The lean-focused performance measurements. Financial decision-making is based on the effect on the company’s total value stream profitability.
Value streams are the profit centers of a company. Which is any branch or division that directly adds to its net figure profitability.
The Marginal Costing
Marginal Costing sometimes called cost-volume-profit analysis. It is the impact on the cost of a product by adding one additional unit into the production. It is useful for short-term economic decisions. Marginal costing can also help the management to identify the impact of varying levels of costs.
Also the volume on operating profit. This type of analysis can be used by the management to gain insight into potentially profitable new products, and sales prices to establish for the existing products. The effect of marketing campaigns.
The break-even point, which is the production level. Where the total revenue for a product equals the total expense. It is calculated as the total fixed costs of a company. Which is divided by its contribution margin.
The contribution margin, that is calculated as the sales revenue minus variable costs. It can also be calculated on a per-unit basis. In order to determine the extent to which a specific product contributes to the overall profit of the company.
History
Many of the Scholars believe that cost accounting was first developed during the industrial revolution. When the emerging economics of industrial supply and demand forced the manufacturers. To start tracking their fixed and variable expenses in order to optimize their production processes.
The Cost accounting allowed railroad and steel companies. To control the costs and become more efficient. By the beginning of the 20th century. Cost accounting had become a widely covered topic in the literature of business management.
So, this is the important information on the topic of Cost Accounting. Here I have mentioned Cost accounting meaning, Its different types, and also the history of cost accounting.
If any Queries or Questions are persisting then, please feel free to comment on the viewpoints.
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