Cost Accounting
Cost accounting is an accounting method that allows companies to determine the total cost incurred in order to provide goods or services. In cost accounting, a company identifies and records all the costs associated with production and selling. With cost accounting, businesses can better understand the cost drivers behind their operations, and make more informed decisions about pricing and cost management.
Cost accounting includes various methods used to analyze, record and report costs. These include job order costing, process costing, activity-based costing, and standard costing. Each of these cost accounting techniques have different objectives and as a result, offer companies benefits that range from inventory control to product costing to performance measurement.
Job Order Costing is one of the oldest and most commonly used cost accounting methods. It is used primarily by businesses that provide services or produce customized products. In job order costing, a company records the materials, direct labor, and other expenses that are associated with specific jobs or customers. This allows companies to accurately track the costs of production and can also help identify any areas of inefficiency.
Process costing is another popular cost accounting method and is ideal for continuous production or large-scale manufacturing. It is used to allocate the cost of production to similar products by taking into account the costs of each individual process or stage of production. Process costing includes the total of all direct materials, labor, and overhead costs for items produced in similar stages. This allows companies to compare the cost of production for identical items and identify any areas that need improvement.
Activity-based costing is a more sophisticated cost accounting method and is used to accurately allocate overhead costs. It is a form of overhead allocation that is based on activities, which are defined as any function that is involved in the production of a good or service. Companies use activities to assign overhead costs to different cost centers, products, services, and customers. This helps businesses better understand the cost of providing goods and services and is a crucial tool when it comes to pricing products and services.
Standard costing is another cost accounting method that is often used in manufacturing settings. Standard costing typically involves setting a predetermined price for a particular product or service. These prices are then used to compare the actual cost of production to the predetermined price. This method allows companies to identify if they are, in effect, over- or under-producing products and helps provide insight into potential areas for improvement.
Cost accounting is an invaluable tool for many businesses as it allows them to accurately measure the cost of production and make better decisions about pricing and cost management. By using cost accounting to analyze, record, and report costs, companies can get a clearer picture of their operations and better understand the cost drivers behind their business.
