Cost accounting evolved over time to suit the dynamic needs of the expanding business enterprises. Early methods of cost accounting were a bit primitive, typically dealing with direct costs like materials and labor. However, this laid the foundation of more sophisticated methods of cost accounting. Even though cost accounting is commonly called a costing method, the scope of cost accounting is far broader than mere cost.
Estimates and Adjustments to Inventory Valuation
Under this system the costs of different sections of production are combined after finding out the cost of each and every part manufactured. The system of ascertaining cost in this way is applicable where a product comprises of many assembled parts, e.g., motor cars, engines, machine tools, typewriters, radios, cycles etc. Costing has been defined as “the technique and process of ascertaining costs”. This is a method where costs are collected and accumulated for each job separately.
Accounting Certifications
It is a tax filing assistance from a real tax professional used to ascertain the cost of executing a work involving heavy expenditure and extending over a long period of time. Under this method, a separate account is opened for each individual contract and the same is debited with expenses and credited with Closing Stock of various items and the value of work completed. This method is suitable for activities like construction of a building, construction of ship, etc. When costs are ascertained department by department, such a method is called ‘departmental costing’. Where the factory is divided into a number of departments, this method is followed. The total cost of each department is ascertained and divided by the total units produced in that department in order to obtain the cost per unit.
Importance/Advantages of Activity-Based Costing
- Fixed cost is treated as period cost and no attempt is made to allocate or apportion this cost to individual cost centres or cost units.
- This is because the cost of overhead per unit will vary depending on the production expenses of each product.
- If a product passes through different stages, each distinct and well-defined, it is desired to know the cost of production at each stage.
- Products are produced without reference to the specific requirements of customers and units of product are homogenous and indistinguishable.
- It allows users to extract and ingest data automatically, and use formulas on the data to process and transform it.
It enhances the reliability of cost data, hence producing nearly true costs and better classifying the costs incurred by the company during its production process. Among all the methods of costing, the one best suited to the service sector is operating costing. We use operating costs to calculate the cost of the services provided to the customers. The total cost incurred during the production of one such batch of goods is divided by the number of units produced to give us the cost per unit.
Organization
In this blog, we will understand what cost accounting is, its key purposes, its formulas and types , with practical examples. Companies looking to expand their product line need to understand their cost structure. Cost accounting helps management plan for future capital expenditures, which are large plant and equipment purchases.
Individually assessing a company’s cost structure allows management to improve the way it runs its business and, therefore, improve the value of the firm. Since it is not GAAP-compliant, cost accounting cannot be used for a company’s audited financial statements released to the public. Marginal costing (sometimes called cost-volume-profit analysis) examines the impact on the cost of a product by adding one additional unit into production.
Marginal Costing – It is the ascertainment of marginal cost differentiating between fixed cost and variable cost. The ascertainment by differentiating between fixed costs and variable costs, of marginal costs and of the effect on profit of changes in volume or type of output. Everything you need to know about the methods and techniques of costing. Fixed costs tend to remain fixed or constant with changes in the volume of output, whereas variable costs typically vary in a directly proportional way based on changes in the volume of output.
When used and operated under a centralized control system, uniform costing will promote operating efficiency by ensuring inter-firm comparisons. It is not a separate method of costing but is usually designed by trade associations to ensure control over members. Job costing is used where production is not repetitive and is done against orders. Each job is treated as a distinct unit, and related costs are recorded separately. This type of costing is suitable to printers, machine tool manufacturers, job foundries, furniture manufacturers etc.
In order to ascertain the same, process costing is employed under which separate account is opened for each process. Where production is not highly repetitive and, in addition, consists of different jobs or lots so that material and labour costs can be identified by order number, the system of job costing is used. This method of costing is very common in commercial foundries and drop forging shops and in plants making specialised industrial equipments. In all these cases an account is opened for each job and all appropriate expenditure is charged thereto.
Contrary to other types of accounting, costing operations are carried out by an organization’s internal management. This internal management is not visible to clients or institutions from the outside. To elaborate on this, costing can also be defined as a systematic process for determining the unit cost of output produced or service rendered. Cost accounting is helpful because it can identify where a company is spending its money, how much it earns, and where money is being lost. Cost accounting aims to report, analyze, and improve internal cost controls and efficiency.