Nov 17, 2022 598 5 mins
598 5 mins
An organisation can become more cost-effective by using a variety of methods in cost accounting. In this, we will learn more about the cost concept in accounting.
The Cost Concept in Accountingis used in business to track, analyse, add up, and evaluate the costs associated with a company’s processes, services, products, or other activities. This enables the organisation in cost management, strategic planning, and decision-making for increased cost-effectiveness.
These financial reports and ledgers allow managers access to their expense data. The management understands where to limit costs and increase more, which aids in developing a vision and long-term strategy. Different cost accounting methodologies exist, including lean accounting, activity-based costing, Standard cost accounting, and marginal costing.
Objectives of cost accounting
The goal of cost accounting is to identify the processes used for recording, categorising, and allocating expenses for supplies, salaries, and overhead. This is essential to ensure that the
The price of goods and services can be determined with accuracy. As a result, the following are cost accounting’s major objectives:
- Finding out how much each of the many items a company manufactures costs per unit.
- To accurately assess the costs of the operations and the process.
- The preparation of reports that may be required to control such wastage, including the disclosure of causes for waste of time, money, or equipment utilisation.
- Provide the necessary information and aid in determining the cost of the goods produced or the services provided.
- Control raw material, work-in-progress, consumable, and completed goods inventories well to reduce the amount of capital invested in them.
- For management planning, decision-making, and control, present and understand data.
- Assistance with budget creation and budgetary management execution.
- Help the management create and implement incentive bonus plans based on productivity and cost savings.
- Organisation of cost-cutting initiatives with the assistance of several departmental managers.
- To offer specialised cost audit services to stop fraud and errors.
- To help management receive accurate and timely information.
- The process of calculating costing profit or loss by tying sales revenues to the costs of the goods or services from which they were generated.
Types of Cost
It is crucial to first comprehend the different forms of costs before beginning to analyse the various costs.
- Fixed cost: Costs that are fixed regardless of changes in production, process, or projects are known as fixed costs. For instance, in a manufacturing facility, the office staff’s salaries are fixed regardless of productivity
- Variable cost: Costs that are subject to variation due to changes in production, process, or project. For instance, the cost of materials and labour in a company that manufactures goods will depend on the volume of work
- Opportunity cost is the price paid for choosing one course of action over another. For instance, choosing to make the toy “Dancing Monkey” in a toy manufacturing facility with limited labour hours and materials will prevent the production of the “Spinning top”. Therefore, the company must take into account the profit of the toy “Spinning top” that it forgoes when evaluating the toy “Dancing Monkey’s” profitability
- Sunk costs are expenses that have been incurred but cannot be reversed. To continue with our toy manufacturing unit example, Sunk costs would be expenses for machinery that have already been paid.
Types of cost accounting
Standard Cost accounting:
To compare how effectively labour and materials are being used to produce goods and services under normal circumstances, this sort of cost accounting uses a variety of ratios. The fact that standard cost accounting stresses labour efficiency despite the fact that labour costs represent a small portion of costs in contemporary businesses is one of its problems
An approach to the costing and monitoring of activities that cost final products, resources allotted to activities, and activities to cost objects based on consumption estimations are referred to as this sort of cost accounting online. It entails adding up all of the departmental overhead costs and allocating them to particular cost objects like goods, services, and clients. Since activity-based costing is thought to be more precise, managers will find it more helpful in evaluating the price and profitability of the goods and services provided by their organisation
Lean accounting places a strong emphasis on value-based pricing and lean-focused performance assessments as an extension of the lean manufacturing and production philosophy created by Japanese businesses
This method of cost accounting, also known as cost-volume-profit analysis, examines the connection between the company’s products, sales volume, production amount, profits, costs, and expenses. The contribution margin, determined by deducting the variable cost from revenue and dividing the remaining amount by revenue, represents this relationship. The management gains valuable insight into possible revenues, the best sales price, and the kind of marketing that is required
Methods of costing
Numerous companies and businesses operate on a job-work basis. We employ the task costing method in such circumstances. In this case, the price is tied to a certain project, assignment, etc.
Here, each order is created to the required specifications; there is no pre-production. If the system is correctly constructed, we can determine how profitable each work is. Among the crucial aspects of work costing are,
When the goods are produced in advance rather than in response to demand, batch costing is applied. In this case, production is batch-based and ongoing. these batches could be made for a particular order or a predetermined quantity. The items are generally uniform under this system. The cost per unit is calculated by dividing the overall cost incurred during the manufacture of one such batch of goods by the total number of units produced. For consumer electronic products like televisions and washing machines, etc., this strategy is particularly helpful.
One of the most widely used costing techniques is this one. Numerous products are regularly produced. These products are uniform and frequently produced in enormous quantities. In order to determine the cost of producing each unit, the process costing method is applied. In a continuous process, the output from one step becomes the input for the following step, and so on, until the final product is produced. In order to calculate the expenses of each process, we must first determine how many units were generated in each step. Sugar, edible oil, chemicals, salt, and other items are a few examples of products that use process costing.
Operating costing is the costing technique that is most appropriate for the service industry. To determine the cost of the services offered to clients, we use operating costs. All consumers must receive a consistent level of service, not specialised services. We then divide the total cost by the total number of services provided to determine the cost.
We use contract costing to determine how much a contract will cost to complete. So it will aid in tracking the expenses associated with a certain contract with a particular client. These costing techniques are primarily employed in construction contracts, such as those for the building of complexes, highways, bridges, dams, etc.
In order to support strategic planning: https://cga.nic.in/ and increase cost effectiveness, cost accounting is a system for tracking and analysing the price of goods and services. It’s crucial for management, staff, and customers, among other stakeholders in a business.
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