INTRODUCTION TO COST
ACCOUNTING
What is cost accounting?
Cost accounting is a system that records, summarizes, analyzes, and
intereprets the details of the costs of materials, labor, and overhead
necessary to produce and sell an article.
Cost accounting is an expanded phase of general or financial accounting
which informs management promptly with the cost of rendering a particular
service, buying and selling a product, and producing a product. It is the
field of accounting that measures, records, and reports information about
costs.
Although cost accounting developed originally in manufacturing businesses,
cost accounting information is useful for all types of activities in all types of
organizations.
What is cost accounting?
Cost accounting is a system by means of which cost of products or services
are determined and controlled. It is the application of accounting and
costing principles, methods and techniques in the ascertainment of costs
and the analysis of savings and/or excesses as compared with previous
experience or with standards. While costing is simply cost determination using
tools such as the arithmetic process and memorandum statements, cost
accounting denotes the formal accounting mechanism for ascertaining
costs. In more specific terms, it uses the double entry bookkeeping method
to ascertain and analyze cost.
What is cost accounting?
Cost accountancy is the application of costing and cost accounting
principles, methods, and techniques to the science, art, and practice of cost
control and the ascertainment of profitability.
It is a science in the sense that it is a body of systematic knowledge which
cost accountants should possess in order to properly perform their duties and
responsibilities.
It is an art because it requires ability and skill to apply the principles of cost
accounting to various managerial concerns like fixing prices, controlling cost,
and establishing optimum levels of operation.
Financial accounting versus cost accounting
Financial accounting is concerned with recording, classifying, and
summarizing financial transactions pertaining to an accounting period. Its
basic objective is to provide information to the shareholders and external
parties on the financial status of an enterprise in the form of a profit and loss
statement and balance sheet.
Cost accounting aims to provide prompt cost data for managerial planning
controlling, and decision making.
Financial accounting versus cost accounting (Table 1)
Managerial, Financial, and Cost Accounting
Managerial accounting focuses on the needs of parties within the
organization rather than interested parties outside the organization.
Managerial accounting information commonly addresses individual or
divisional concerns rather than those of the enterprise as a whole. The
information may be current or forecasted, quantitative or qualitative,
monetary or non-monetary, and most of all, timely. The data are futuristic and
some of the costs are not recorded on the accounting books.
Managerial accounting is not separate and distinct from financial
accounting. Financial accounting data are used in the managerial
accounting system. Management decisions made today will impact the
financial statement of future periods. There is no requirement or legislation
that mandates the format or use of managerial accounting. Management
accounting methods are tools that are available for use to management.
Managerial, Financial, and Cost Accounting
Cost accounting is the intersection between financial and managerial accounting. Cost
accounting information is needed and used by both financial and managerial accounting.
Cost accounting provides product cost information to external parties such as stockholders,
creditors, and various regulatory boards for credit and investment decisions. Cost accounting
provides product cost information also to internal parties such as managers for planning and
controlling.
Financial Cost Managerial
Accounting Accounting Accounting
Uses of Cost Accounting Data
Determining Product Cost
Cost accounting procedures help management in gathering the data
needed to determine prouct cost and thus generate meaningful financial
statements and other reports. Cost procedures must be designed to permit
the computation of unit costs as well as total product costs.
Unit cost information is also useful in making a variety of important marketing
decisions:
a. Determining the selling price of a product
b. Meeting competition
c. Bidding on contracts
d. Analyzing profitability
Uses of Cost Accounting Data
Planning and Control
Planning is the process of establishing objectives or goals for the firm and
determining the means by which the firm will attain them. Planning is essential to
good management because it provides a means of coordinating all of the
operation of the firm. Cost accounting helps in the development of plans by
providing historial costs that serve as basis for projecting data for planning.
3 Components of planning:
1. Strategic planning – setting long range goals and objectives to determine the company’s overall
direction.
2. Tactical planning – plans for a shorter range or time period and emphasizes plans to achieve the
strategic goals.
3. Operation planning – relates to the day to ay implementation of tactical plans. It emphasizes the
coordination of the major factors of production (materials, labor, and facilities).
Control is the process of monitoring the company’s operations and determining
whether the objectives identified in the planning process are being accomplished.
Basic Cost Systems
1. Job order costing is a system for allocating costs to groups of unique product. It
is applicable tote production of customer specified products such as the
manufacture of special machines. Each job becomes a cost center for which
costs are accumulated. A subsidiary record (job cost sheet) is needed to keep
track of all unfinished jobs (work in process) and finished jobs (finished goods).
2. Process costing is a system applicable to a continuous process of production of
the same or similar goods e.g. oil refinin gd chemical production. Since
there is no need to determine the costs of different groups of products
nhe product is uniform, each processing department becomes a
costbecausea t center.