Cost accounting is an approach of accounting that intends to logically analyse all the expenses throughout an accounting duration to offer a clearer picture for the business owners in devising management strategies (Also see Ways Accountants Help in Counter Unpredictability). The process started with gathering data, categorizing and document all the expenses incurred, that later summed up as well as evaluated to discover the most beneficial production choices.
Characteristic of costs
It is necessary to explain the characteristic of the costs before jumping into cost accounting. In cost accounting, costs are mainly split into the below categories:
These are costs that do not change according to the production volume. They consist of expenditures like the rental expenses.
These are costs that change according the production volume. They consist of expenses like product cost itself, salesperson’s commission and the delivery costs.
These are expenses connected with the daily operation of business. They can come in either fixed or variable form.
These are the costs incurred as a direct result of manufacturing, delivering and promoting the business’ products. These are usually made up of direct purchase costs and factory overheads.
Different methods of Cost Accounting
The key cost accounting methods are the standard cost accounting, marginal costing, lean accounting as well as activity-based accounting.
Standard cost accounting
This kind of cost accounting leverage on various ratios to form a contrast as to the effectiveness of the work process or the ingredient being consumed to manufacture a product in a standard situation. The main criticism standard cost accounting always received is that it ignores the overall structure of the cost when it does not weigh the importance of each cost element (Also see Everyday Life Accounting Principles Most People Ignored).
The other name for marginal costing is cost-volume-profit analysis, this the most widely used cost accounting in decision making as it includes evaluating the correlation between the company’s direct cost, fixed costs, sunk costs and the sales volume. This connection is called the contribution margin, which is computed by deducting the all the variable costs from sales and dividing that by the volume. It provides the monitoring a valuable understanding on the contribution of each product, the optimum selling price as well as a suitable marketing strategy.
The ideology of lean production as well as manufacturing established by the Japanese, lean accounting focus heavily on value-based costing and placing efficiency on the top priority as the rule of success (Also see Reason a Bookkeeper Is Crucial For The Success of a Business).
Activity-based cost accounting
This is a technique requiring the user to place more attention on a specific activity which includes mapping resource intake, the outcome and the resources used in a specific activity. It entails collecting the expenses report from each division and then designating them to certain dimension, which can be a product or a client. Activity-based costing is thought to be very helpful for the supervisors in recognizing the cost and profit of their business’s output.
Cost accounting recognised that finance is one of the key factors of production but at the same time, money is the ruler that used to measure the efficiency and effectiveness of the processes. Nonetheless, there isn’t any specific requirements or benchmark and it differs from one business to another. This is because cost accounting is mainly used for management purpose, unlike the services you get from an accounting service in Johor Bahru where the output is relied upon by various parties that requires to meet the Financial Reporting Standards.