What is Cost Accounting- Types
What is Cost Accounting?
Cost accounting is a separate branch of accounting mainly concerned with calculating the cost of production of different types of products and services. It helps the management in taking a decision about which product or service is more profitable.
The cost accounting includes all the expenses incurred on the purchase of raw material, expenses incurred in the factory for the production of goods, office expenses, selling expenses and any other expenses incurred from production to ultimate sale of products or rendering services.
After determination of cost of different types of products or services, the management decides which product or sequence of products to be considered for sale or service or sequence of services to be rendered keeping in view their cost and budget of the business.
The cost accounting also helps constantly to keep watch on the cost of production or services to render throughout the year and also in deciding the improvements needed to ensure the maintenance of the economy in their cost during the entire period of the business.
For example:
The production unit or factory of a company can produce six products, A, B, C, D, E, and F. The cost of production of all these products are as under:
Product A Rs. 100
Product B Rs. 110
Product C Rs. 120
Product D Rs. 115
Product E Rs. 105
Product F Rs. 125
The selling price of all these products is the same i.e. Rs. 130 and the capacity of the factory are to produce 1000 units of each product per day whereas the budget of the company allows selecting only 3 products.
Thus, it will be more beneficial for the management to select product A, E and B costing Rs. 100, 105 and 110 respectively.
The costing department of the company will also keep watch on the cost of production of all these units throughout the business period and in case the cost of any product increases, the management will take necessary steps to improve its cost or switch over to other product which is more profitable.
The same method of costing applies in the case of service industries for selection of services to be rendered by the company.
The motive of Cost Accounting
As stated above, cost accounting plays a very important role in determining the cost of production of goods and services without which the management will not be able to select the products for sale and earn more and more profit. The main purpose of cost accounting can be derived as under:
1. Cost Calculation: This is the most important function of cost accounting which helps management to decide which product is more profitable and select for production and sale. The profit of the company more or less depends on an effective cost Calculation.
2. Cost Control: This function helps management to keep watch on the cost of a product and also choose products which could be covered within the company's budget.
3. Cost Cutting: The cost accounting department and management always make possible efforts to reduce the cost of all products and services. The less cost means more profit.
Need for Cost Accountant in the Business
The cost accountant plays a very vital role in determining the cost of each product or project. Generally, the cost accountant is a qualified accountant in costing like in India, the qualified cost accountant has to qualify the Indian Cost and Works Accountant (ICWA) exam.
Generally, the qualified cost accountants provide their full-time services in big companies whereas the small business or companies hire the part-time cost accountant. After qualifying ICWA the person becomes a professional cost accountant and can render his services either full time or can start his consulting firm.
Cost accountant must be familiar with all the ways of costing and also with all the software helpful in cost determination. Following are the main methods of cost accounting which allocates indirect cost to each product or service:
Functions based costing: It includes both fixed and variable costs of the product.
Continues Costing: It is mainly based on increasing the efficiency of the company by reducing production hurdles and making the production system more profitable.
Standard Costing: This system of costing is based on the average cost of all direct cost of a product. This system is very popular in costing into the medium size of units because it is a very simple method to use.
Cost based profit: It includes the total fixed and variable costs and the total number of items produced and calculate the proportion level which will be more profitable for the company.
Cost Accounting V/s Financial Accounting
1. The rules and regulations or methods of financial accounting are generally accepted by about all the companies whereas the methods of cost accounting differ from industry to industry and also from company to company.
2. In traditional accounting, generally, P & L are calculated by substructing expenses from profit but in cost accounting, the main focus is on cost the, therefore, reducing the cost of process and production.
3. Financial accounting is mainly concerned with giving the true and fair view of the financial position of the company and presented to the stakeholders, shareholders, owners, investors, banks, tax authorities.
Any other concerned with the company whereas cost accounting is concerned with the reduction of cost of goods or services and useful for the management in taking decision about the product(s) to be produced or purchased for sale or services to be rendered. It directly affects the profitability of the company.
4. Financial accounting gives the overall financial picture of the business whereas cost accounting gives the cost determination system of the company.
Various Types of Costs
Various Types of Costs
The cost accountants or costing institutes have divided the cost of goods or services in various forms. Some of them commonly used are as under:1. Fixed Costs
Fixed costs are the costs which remain the same in any quantity of production, projects or services viz. rent, electricity, the salary of staff, repair and maintenance of plant and machinery etc.2. Variable Costs
The variable costs increased or decreased with the quantum of production like the cost of raw material, cost of labour directly attached with a particular product, process or project. 3. opportunity Costs
The calculation of opportunity costs is very complicated. When a company has to decide which products or services are more profitable among various options, the expenditure incurred thereon is the opportunity cost.4. Sunk Costs
Sunk costs are the costs once incurred it cannot be recovered like the cost of plant and machinery.
Techniques of Cost Accounting
The cost accountants or costing institutes have divided the cost of goods or services in various forms. Some of them commonly used are as under:
1. Fixed Costs
Fixed costs are the costs which remain the same in any quantity of production, projects or services viz. rent, electricity, the salary of staff, repair and maintenance of plant and machinery etc.
2. Variable Costs
The variable costs increased or decreased with the quantum of production like the cost of raw material, cost of labour directly attached with a particular product, process or project.
3. opportunity Costs
The calculation of opportunity costs is very complicated. When a company has to decide which products or services are more profitable among various options, the expenditure incurred thereon is the opportunity cost.
4. Sunk Costs
Sunk costs are the costs once incurred it cannot be recovered like the cost of plant and machinery.
Techniques of Cost Accounting
There are various types of cost accounting techniques which directly helps management in decision making. these are given as under:1. Marginal Costing
This technique helps management to decide how many numbers of units of one product is to be produced for more and more profit and minimum cost. Under this technique, only variable costs are considered because the fixed cost remains the same for any number of units.2. Standard Costing
The standard costing technique is mainly concerned with the actual cost incurred in production or services or project and then it is compared with the estimated cost to measure how effective is our costing system and whether it needs any kind of improvement.3. Direct Costing
Under this costing technique all the expenses on production, process or project are directly charged to them.4. Historical Costing
It is the comparative study of all expenses incurred after completion of a process.5. Uniform Costing
It facilitates the comparison of the cost incurred under various units while adopted the same costing practice.6. Absorption Costing
Under this method, the full cost is charged to a particular product, service, process or project. This is also called full costing.Conclusion
The cost accounting includes all the expenses incurred on the purchase of raw material, expenses incurred in the factory for the production of goods, office expenses, selling expenses and any other expenses incurred from production to ultimate sale of products or rendering services.
After determination of cost of different types of products or services, the management decides which product or sequence of products to be considered for sale or service or sequence of services to be rendered keeping in view their cost and budget of the business.
There are various types of cost accounting techniques which directly helps management in decision making. these are given as under:
1. Marginal Costing
This technique helps management to decide how many numbers of units of one product is to be produced for more and more profit and minimum cost. Under this technique, only variable costs are considered because the fixed cost remains the same for any number of units.
2. Standard Costing
The standard costing technique is mainly concerned with the actual cost incurred in production or services or project and then it is compared with the estimated cost to measure how effective is our costing system and whether it needs any kind of improvement.
3. Direct Costing
Under this costing technique all the expenses on production, process or project are directly charged to them.
4. Historical Costing
It is the comparative study of all expenses incurred after completion of a process.
5. Uniform Costing
It facilitates the comparison of the cost incurred under various units while adopted the same costing practice.
6. Absorption Costing
Under this method, the full cost is charged to a particular product, service, process or project. This is also called full costing.
Conclusion
The cost accounting includes all the expenses incurred on the purchase of raw material, expenses incurred in the factory for the production of goods, office expenses, selling expenses and any other expenses incurred from production to ultimate sale of products or rendering services.
After determination of cost of different types of products or services, the management decides which product or sequence of products to be considered for sale or service or sequence of services to be rendered keeping in view their cost and budget of the business.
Thanks for sharing this very informative post.
https://skatax.co.uk/
Thanks for your support
https://deepaudit.blogspot.com/2019/04/tax-accounting.html?showComment=1627282214821&m=1#c7215614165582548