Cost accounting is a method of accounting that aims to capture all the costs incurred (Also see Cost Accounting Basics) during an accounting period to aid the management in making the correct decisions. It involves collecting, classifying and recording all the costs incurred, which are then summarised and analysed (Also see 5 Most Important Financial Ratios) to find the best-selling price and determine where savings are possible.
Types of costs
Before going into the types of cost accounting, let’s learn about the different types of costs. In cost accounting, costs are classified into the following four types:
Fixed costs:
These are costs that do not vary according to the amount of work done. They include expenses like the payment made for renting a building.
Variable costs:
These are costs that vary according to the amount of work done. They include costs like packaging, shipping and processing costs.
Operating costs:
These are costs associated with the day-to-day running of the business. They can be either fixed or variable.
Direct costs:
These are the costs directly related to producing, acquiring and selling the company’s products. They include things like labour costs and electricity costs.
Types of Cost Accounting
There are mainly four types of cost accounting: standard cost accounting, activity based accounting, lean accounting and marginal costing.
Standard cost accounting:
This type of cost accounting uses different types of ratios to compare how efficiently labour and materials are being used (or can be used) to produce goods and services in standard conditions. One of the issues associated with standard cost accounting is that it emphasizes labour efficiency even though labour costs make up small percentage of costs in modern companies.
Activity based cost accounting:
This type of cost accounting is defined as “An approach to the costing and monitoring of activities which involves tracing resource consumption and costing final outputs, resources assigned to activities, and activities to cost objects based on consumption estimates.” It involves accumulating the overheads from each department and assigning them to specific cost objects, such as products, services and customers. Activity based costing is considered to be more accurate and, as such, more useful to managers in understanding the cost and profitability of their company’s products and services.
Lean accounting:
An extension of the philosophy of lean manufacturing and production developed by Japanese companies, lean accounting emphasizes on value-based pricing and lean-focused performance measurements.
Marginal costing:
Also called cost-volume-profit analysis, this type of cost accounting involves analysing (Also see 4 Tips for Analyzing an Income Statement) the relationship between the company’s products, sales volume, production amount, profits, costs and expenses. This relationship is known as the contribution margin, which is calculated by subtracting the variable cost from revenue, dividing the remainder by revenue. It gives the management a useful insight into potential profits, the most profitable sales price and type of marketing needed.
In cost accounting, money is viewed as the economic factor of production. In contrast, money is viewed as the measure of economic performance in financial accounting. Because cost accounting is used as an internal management tool, it does not have to adhere to any specific standards and varies from one company to another. If you are having a problem getting your cost accounting right, source out for the best accounting services in Singapore and they will help you get your accounts straightened out.
