Definition of Cost Accounting and Examples
How Cost Accounting Works
Types of Cost Accounting Systems
Cost Accounting vs. Financial Accounting
Definition of Cost Accounting and Examples
Cost accounting is a type of managerial accounting that focuses on the costs of a company with the aim of improving profitability and efficiency. Cost accounting is an internal accounting system that serves the company’s managers and staff. Business owners who focus on the cost aspect of their operations use cost accounting to understand how to reduce costs and increase profitability.
How Cost Accounting Works
Since each company has its own structure, the way cost accounting works varies from one company to another. Cost accounting is customizable, and business owners can choose a system that makes the most sense for their type of business. However, cost accounting typically comes in two forms:
Job Order Costing
Job order costing is typically used in companies that produce non-standardized products. If a company builds customized cars, it is likely that the cost of each car is different because each customer has a specific set of requirements. Since the product is unique, it is easier to track the cost of each order or service on a project or job order basis.
Process Costing
Process costing is used in companies that produce standardized products like cakes or soft drinks. In the case of a soft drink factory, it is likely that the cost of each can of soda is the same because the production costs do not change as quickly as they would for a company making customized products. Therefore, companies use the process costing method to evaluate the cost of an entire batch of soft drinks, then assign a cost to each can based on that figure. We can think of economies of scale that can reduce the unit cost if quantities increase, but this scenario is less apparent in a mature industry like soft drinks with established brands.
Types of Cost Accounting Systems
The beauty of cost accounting is that a company can use a combination of systems to design a cost method that best fits their business. While job costing and process costing are the most common types of cost accounting, there are many other systems that companies can use.
Standard Costing
Standard costing is a traditional method for costing a company. This method assigns an average cost equally across labor, materials, and overhead in the production process. Small businesses that use standard costing like this method because it seems straightforward and easier to manage compared to other costing systems.
Activity-Based Costing
Activity-based costing (ABC) calculates costs based on the activity and effort used to produce a product or service. Unlike standard costing, this method can allocate a more precise portion of overhead to the factors responsible for increasing costs. Fixed and variable costs can be included using this method.
Lean Accounting
Lean accounting is a method that focuses on the value of each part in the production process and seeks to minimize costs as much as possible. Lean accounting is closely related to lean manufacturing, where lean accounting places the highest value on what customers consider valuable and reduces costs to maximize that philosophy.
Marginal Costing
Marginal costing evaluates the cost of producing each additional unit. This method is typically used when a company wants to find the optimal point at which maximum production is achieved while minimizing costs.
Environmental Accounting
Environmental accounting has emerged as a result of increasing social and environmental awareness. Now that companies must be aware of their environmental impact, more companies are incorporating environmental factors into costs. The environmental accounting method includes regulatory fines and the cost of complying with environmental regulations.
Target Costing
Companies that wish to achieve consistent profits use target costing to manage production costs. With this method, the company researches and evaluates the costs of a process before production begins. If the company anticipates that expenses will exceed expected costs, it will cancel the project. This approach is best for reducing costs when the project is in the planning and setup stages.
Cost
Life Cycle
The life cycle cost evaluates the cost of producing a product from start to finish. Unlike target costing, this method tracks production costs over the product’s lifetime. As a result, life cycle costs can last for years longer than other costing methods. The U.S. government uses this costing method when implementing building designs and energy procedures.
Production Accounting
This technique focuses on all aspects that prevent a company from succeeding or achieving its goals. These problems can include financial issues but also encompass non-financial factors that limit the company. This method emphasizes resolving production bottlenecks to improve productivity, whether by purchasing additional equipment or adding more workers.
Cost Accounting vs. Financial Accounting
Cost Accounting Financial Accounting
Internal audience: employees, managers, and company leaders External audience: shareholders, government regulators, investors, and creditors
No specific format governed by industry standards
No specific regulations are subject to governed by GAAP or IFRS
Any time or frequency that the report is prepared at the end of the reporting period: monthly, quarterly, or annually
Unlike financial accounting, which focuses on reporting for company shareholders and outside stakeholders, cost accounting is internal. Company management and leaders use cost accounting to inform their decisions on how to improve company operations.
Financial accounting focuses on taking the company’s financial data and presenting it in a report for stakeholders and regulators. This report provides an overall financial picture of the company’s performance in terms of its assets, liabilities, and shareholders’ equity.
It is worth noting that financial reports include the balance sheet, cash flow statements, income statements, and statements of shareholders’ equity.
Key Takeaways
Cost accounting evaluates the company’s costs, including fixed and variable costs, to reduce expenses and increase profitability. There are many cost accounting systems that can be tailored to fit the company’s needs. Since cost accounting serves the company’s employees, it is not subject to GAAP or IFRS regulations like financial accounting. However, both types of accounting are essential for the company and can be used to assess company performance and improve profitability.
Source: https://www.thebalancemoney.com/what-is-cost-accounting-5199195
}
.lwrp .lwrp-list-row-container{
display: flex;
justify-content: space-between;
}
.lwrp .lwrp-list-row-container .lwrp-list-item{
width: calc(12% – 20px);
}
.lwrp .lwrp-list-item:not(.lwrp-no-posts-message-item){
}
.lwrp .lwrp-list-item img{
max-width: 100%;
height: auto;
object-fit: cover;
aspect-ratio: 1 / 1;
}
.lwrp .lwrp-list-item.lwrp-empty-list-item{
background: initial !important;
}
.lwrp .lwrp-list-item .lwrp-list-link .lwrp-list-link-title-text,
.lwrp .lwrp-list-item .lwrp-list-no-posts-message{
}@media screen and (max-width: 480px) {
.lwrp.link-whisper-related-posts{
}
.lwrp .lwrp-title{
}.lwrp .lwrp-description{
}
.lwrp .lwrp-list-multi-container{
flex-direction: column;
}
.lwrp .lwrp-list-multi-container ul.lwrp-list{
margin-top: 0px;
margin-bottom: 0px;
padding-top: 0px;
padding-bottom: 0px;
}
.lwrp .lwrp-list-double,
.lwrp .lwrp-list-triple{
width: 100%;
}
.lwrp .lwrp-list-row-container{
justify-content: initial;
flex-direction: column;
}
.lwrp .lwrp-list-row-container .lwrp-list-item{
width: 100%;
}
.lwrp .lwrp-list-item:not(.lwrp-no-posts-message-item){
}
.lwrp .lwrp-list-item .lwrp-list-link .lwrp-list-link-title-text,
.lwrp .lwrp-list-item .lwrp-list-no-posts-message{
};
}
Leave a Reply