What is cost accounting: their types and classifcation

What is cost Accounting, Objective of cost accounting Classification of Costing, Types of cost accounting

Cost Accounting

Cost accounting is a technique in which we examine, summarize and study company’s cost incurred in the production of units. Cost accounting helps the management in controlling and making strategic planning to increase the efficiency and reduce the cost for the production. In this technique different types of reports are prepared, which are used by management to study the process in detail and see the weak and strong areas, and also identify the area which need more attention to reduce the production cost. These reports are also used to prepare future plan.

In this process we calculate cost of good sold or services. Cost of goods sold is a financial document which include allocation of different types of cost incurred by various departments for the production of units. Cost of goods sold is a summarize presentation of cost incurred by the different departments. It includes material cost, labor cost and overhead cost.

Features of cost Accounting

It’s a sub class of accounting which is used to calculate the production cost.

Cost accounting provide valuable information to management for decision making process and to prepare future plan.

It provides information to prepare standard cost per unit and provide data to fixing the price of goods and services.

It’s a tool to measure the efficiency of the whole manufacturing process. It discloses the wastage of material and labor efficiency.

Objective of cost accounting

Cost control: Management prepared budget for every project and monitor the cost incurred and compare it with actual cost to check where project is going over cost or under cost.

Cost computation: It is the main objective of the company to determine the cost of production per unit and sales of unit per to get the profit margin per unit.

Cost reduction: Cost accounting provide detail summary of cost incurred in the production process. So that management point out the key area which need attention to reduce the cost per unit of production.

Classification of costing

• Direct costing
• In direct costing

Direct costing

Direct costing includes all cost which are directly involved in production cost and easily identifiable.

Direct costing includes direct material and direct labor which are used in producing the goods.

In direct costing

These are set of costs which are not easily identifiable separately, because these cost assist in functioning multiple activities.

There are different types of Cost accounting such as

• Standard costing
• Marginal costing
• Lean accounting
• Activity based costing

Standard costing

Standard costing is a process in which estimated cost is applied to production instead of actual cost. Variances between standard cost and actual cost are calculated on periodic basis and charged to production to get actual production cost. The main reason for using standard cost is that there are many areas in production where it is time consuming to collect actual cost, so standard cost used as a close to actual cost.

Marginal costing

Marginal costing is a costing technique where only variable cost is charged to production to calculate the cost per unit. In this costing system fixed cost is not charged to production to measure the cost of production per unit.

Marginal cost = Direct material cost+ Direct Labor cost+ Variable cost.

Marginal costing system is adopted by management to get the actual cost of production for decision making purpose.

Lean accounting

Lean accounting is a combination of principles and process that provide numerical feedback after implementing lean manufacturing and lean inventory practice. When you make changes in in operations or organizing operations like change the workers time or shift. Its very difficult to tell how much the difference these adjustments made. Production seems smooth and customers are satisfied but get this data in numerical form or allowing managers to see the consequences of adjustments and to compare the results with older result is called lean accounting.

Lean accounting treats some traditional accounting rules in another way, because traditional rules cannot provide valued results that we can get from lean accounting.

Activity based costing

Activity based costing (ABC) is a process of allocation of cost charged to production in a most appropriate way than the traditional costing system where cost charged to production according to labor hours or machine hours.

In Activity based costing (ABC) cost assign to different activities that are actually cause of overhead. Then  it assign the cost of these activities of the production that are actually involved in production process.