LEARN MORE...

Home
Documents
May 2015
22
Cost Accounting

Cost Accounting

Content type

User Generated

Type

Study Guide

Uploaded By

gubeybpxv

Pages

Showing Page:

1/14

Cost accounting 
In management accounting, cost accounting is that part of management accounting which 
establishes budget and actual cost of operations, processes, departments or product and the 
analysis of variances, profitability or social use of funds. Managers use cost accounting to 
support decision making to reduce a company's costs and improve its profitability. As a form 
of  management  accounting,  cost  accounting  need  not  follow  standards  such  as  GAAP, 
because  its  primary  use  is  for  internal  managers,  rather  than  external  users,  and  what  to 
compute is instead decided pragmatically. 
Costs  are  measured  in  units  of  nominal  currency  by  convention.  Cost  accounting  can  be 
viewed as translating the Supply Chain (the series of events in the production process that, in 
concert, result in a product) into financial values. 
There are at least four approaches: 
  Standardized Cost Accounting 
  Activity-based Costing 
  Throughput Accounting 
  Marginal Costing / Cost-Volume-Profit Analysis 
Classical Cost Elements are: 
1.  Raw Materials 
2.  Labor 
3.  Indirect Expenses / Overhead 
Contents 
  1 Origins 
  2 Standard Cost Accounting  
o  2.1  Weaknesses  of  Standard  Cost  Accounting  for  Management  Decision 
Making 
o  2.2 The Development of Throughput Accounting 
  3 Activity-based costing 
  4 Marginal Costing 
  5 References 
  6 See also 
Origins 
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. 

Showing Page:

2/14

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, the importance of these "fixed costs" has

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 twentieth century, these costs were of little importance to most businesses.

However, in the twenty-first century, these costs are often more important than the variable

cost of a product, and allocating them to a broad range of products can lead to bad decision

making. Managers must understand fixed costs in order to make decisions about products and

pricing.

For example: A company produced railway coaches and had only one product. To make each

coach, the company needed to purchase $60 of raw materials and components, and pay 6

laborers $40 each. Therefore, total variable cost for each coach was $300. Knowing that

making a coach required spending $300, managers knew they couldn't sell below that price

without losing money on each coach. Any price above $300 became a contribution to the

fixed costs of the company. If the fixed costs were, say, $1000 per month for rent, insurance

and owner's salary, the company could therefore sell 5 coaches per month for a total of $3000

(priced at $600 each), or 10 coaches for a total of $4500 (priced at $450 each), and make a

profit of $500 in both cases.

Standard Cost Accounting

In modern cost accounting, the concept of recording historical costs was taken further, by

allocating the company's fixed costs over a given period of time to the items produced during

that period, and recording the result as the total cost of production. This allowed the full cost

of products that were not sold in the period they were produced to be recorded in inventory

using a variety of complex accounting methods, which was consistent with the principles of

GAAP. It also essentially enabled managers to ignore the fixed costs, and look at the results

of each period in relation to the "standard cost" for any given product.

For example: if the railway coach company normally produced 40 coaches per month,

and the fixed costs were still $1000/month, then each coach could be said to incur an

overhead of $25 ($1000/40). Adding this to the variable costs of $300 per coach

produced a full cost of $325 per coach.

This method tended to slightly distort the resulting unit cost, but in mass-production

industries that made one product line, and where the fixed costs were relatively low, the

distortion was very minor.

For example: if the railway coach company made 100 coaches one month, then the

unit cost would become $310 per coach ($300 + ($1000/100)). If the next month the

Showing Page:

3/14

End of Preview - Want to read all 14 pages?

Access Now

Unformatted Attachment Preview

Cost accounting In management accounting, cost accounting is that part of management accounting which establishes budget and actual cost of operations, processes, departments or product and the analysis of variances, profitability or social use of funds. Managers use cost accounting to support decision making to reduce a company's costs and improve its profitability. As a form of management accounting, cost accounting need not follow standards such as GAAP, because its primary use is for internal managers, rather than external users, and what to compute is instead decided pragmatically. Costs are measured in units of nominal currency by convention. Cost accounting can be viewed as translating the Supply Chain (the series of events in the production process that, in concert, result in a product) into financial values. There are at least four approaches: Standardized Cost Accounting Activity-based Costing Throughput Accounting Marginal Costing / Cost-Volume-Profit Analysis Classical Cost Elements are: 1. Raw Materials 2. Labor 3. Indirect Expenses / Overhead Contents 1 Origins 2 Standard Cost Accounting 2.1 Weaknesses of Standard Cost Accounting for Management Decision Making 2.2 The Development of Throughput Accounting 3 Activity-based costing 4 Marginal Costing 5 References 6 See also Origins 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 complexit ...
Purchase document to see full attachment