Cost accounting is an accounting process that aims to identify the company’s production costs by assessing the input costs of each and every step of the production process. The fixed costs such as depreciation of capital equipment is also included in the calculations.
Cost accounting will first measure and record these costs individually. It will then compare the input results to output or actual results to help the company to measure its financial performance.
Types of cost accounting.
There are several types of cost accounting namely:
- Standard cost accounting.
- Lean accounting.
- Activity-based costing.
- Resource consumption accounting.
- Throughput accounting.
- Lice-cycle costing.
- Environmental accounting.
- Target costing.
Basic cost elements.
The basic cost elements in cost accounting are:
- Raw materials.
The key activities of cost accounting
- Defining the costs as direct materials, direct labor, fixed overhead, variable overhead, and period costs.
- (If the company uses a standard costing system.) It will assist the engineering and procurement departments in generating standard costs.
- It uses an allocation methodology to assign all costs except period costs to products and services and other cost objects.
- It defines the transfer prices at which components and parts are sold from one subsidiary of a parent company to another subsidiary.
- Examining costs incurred in connection to the activities conducted by the company, to see if the company is using its resources effectively.
- Highlighting any changes in the trend of various costs incurred.
- Analyzing costs that will change as the result of a business decision such as changing a supplier.
- To evaluate the need for capital expenditures.
- Building a budget model that forecasts changes in costs based on the expected activity levels of the company.
- To determine whether or not costs can be reduced.
- To provide cost reports to the management of the company. May improve the operation of the business.
- Participating in the calculation of costs that will be required to manufacture a new product design or to upgrade existing product.
- To analyze the production system in order to identify any bottlenecks and the impact it has on the efficiency of production.