Cost accounting is a process of collecting, analyzing, summarizing and evaluating various alternative courses of action. Its goal is to advise the management on the most appropriate course of action based on the cost efficiency and capability. Cost accounting provides the detailed cost information that management needs to control current operations and plan for the future.
Since managers are making decisions only for their own organization, there is no need for the information to be comparable to similar information from other organizations. Instead, information must be relevant for a particular environment. Cost accounting information is commonly used in financial accounting information, but its primary function is for use by managers to facilitate making decisions.
Unlike the accounting systems that help in the preparation of financial reports periodically, the cost accounting systems and reports are not subject to rules and standards like the Generally Accepted Accounting Principles (GAAP). As a result, there is wide variety in the cost accounting systems of the different companies and sometimes even in different parts of the same company or organization.
All types of businesses, whether service, manufacturing or trading, require cost accounting to track their activities.Cost accounting has long been used to help managers understand the costs of running a business. Modern cost accounting originated during the industrial revolution, when the complexities of running a large scale business led to the development of systems for recording and tracking costs to help business owners and managers make decisions.
In the early industrial age, most of the costs incurred by a business were what modern accountants call “variable costs” because they varied directly with the amount of production.Money was spent on labor, raw materials, power to run a factory, etc. in direct proportion to production. Managers could simply total the variable costs for a product and use this as a rough guide for decision-making processes.
Some costs tend to remain the same even during busy periods, unlike variable costs, which rise and fall with volume of work. Over time, these “fixed costs” have become more important to managers. Examples of fixed costs include the depreciation of plant and equipment, and the cost of departments such as maintenance, tooling, production control, purchasing, quality control, storage and handling, plant supervision and engineering. In the early nineteenth century, these costs were of little importance to most businesses. However, with the growth of railroads, steel and large scale manufacturing, by the late nineteenth century these costs were often more important than the variable cost of a product, and allocating them to a broad range of products led to bad decision making. Managers must understand fixed costs in order to make decisions about products and pricing.
Types of cost accounting
The following are different cost accounting approaches:
*Standard cost accounting
*Resource consumption accounting
*Life cycle costing
Elements of cost
Basic cost elements are:
*Material (Material is a very important part of business)
Direct material/Indirect material
Direct labor/Indirect labor
.Production or works overheads
.Maintenance & Repair
.Other Variable Expenses
.Other Fixed Expenses
(In some companies, machine cost is segregated from overhead and reported as a separate element)
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