Cost, Costing, and Cost Accounting: Explained

The three terms, Cost Accounting, Costing and Cost, all are associated integrally with studies of fundamentals of accounting. Knowing them by heart is essential to continue understanding accounting in depth. The following essay is prepared with the aim of clearing the concept of all the three terms here and other things related to them. 

Cost Accounting 

When a company or organization’s cost accounting is in discussion, their business practice is referred to that involves the complete list of spending done by the company and recording them too for the purpose of summarizing and examining afterwards. The spending might be for various reasons such as acquiring a product or service, completing a process and others. 

This way the cost spent can be studied and controlled if the need arises. Strategic plans can be formulated on the basis of cost accounting and cost efficiency is thus improved. The company authority is also aware of the cost information with improved visibility. Which areas need more cost approval and which section can do with lesser amounts sanctioned, can be identified from this. 

The business practices, in which the company’s cost spent on any production process is recorded, examined, summarized, and studies are referred to as cost accounting. With the help of cost accounting, a company can control the cost and accordingly make strategic planning and decisions to improve cost efficiency. The management is able to analyze their cost information with the help of cost accounting and helps to create a future plan for the company. 

Cost Accounting can be classified into various types which include marginal costing, activity-based costing, standard cost accounting, and lean accounting. With the use of them the costs of goods and services and the expenditure made, both can be calculated. All the expenditures made are formatted in an organised way so that cost control is done efficiently by the management. Cost of selling, production cost and distribution cost all are determined from cost accounting. 

Characteristic Features of Cost Accounting

Some of the characteristics of cost accounting are listed below-

• It is a branch of accounting involving the cost of goods and services. 

• Management is able to analyze the data which helps in decision-making and budgeting for the future. The data achieved is used in financial accounting. 

• It is the sub-field for accounting where the process for accounting of costs is studied. The costing data that are recorded in this helps the management in developing the budget. It is also used in future planning and decision making processes by the organisation.

• Certain standard costs and budgets can be established with the help of cost accounting. 

• Whether a particular process adapted by the company is efficient or not can be determined from this data. 

• Costing data is provided that further helps in fixing the prices of products.

• It helps to predict the amount of wastage of time and resources. 

Types of Cost Accounting

There are mainly four types of Cost Accounting namely,

• Standard Accounting

• Lean Accounting

• Marginal Accounting

• Activity based Costing

Let us study the various types of cost accounting.

1. Standard Cost Accounting- The cost that could have incurred for the production of a particular product or service and the cost that actually have incurred are compared by the companies. This is known as standard accounting. In this type of cost, the manufacturers identify and analyze the differences between the actual costs in the production of these goods and the costs that were predicted by them in order to produce those goods. 

2. Lean Accounting- Manufacturers collect the processes and principles to access numerical feedback so that they can implement lean inventory and manufacturing practices. This is known as lean accounting. This system is for the lean organization that provides the necessary financial and nonfinancial information which is relevant in order to execute the lean strategy and drive financial success.

3. Marginal Costing- In this type of costing, all the costs are divided separately into variable and fixed costs. The former is directly proportional to production levels. But in this case the cost per unit, though a variable, remains unchanged. The latter, fixed cost, is not associated with production levels. Here, though production quantities vary, the cost remains fixed. Or in simple terms, the fixed costs do not have any relation to the level of production while the variable costs change as there is a change in the production level.

4. Activity-Based Costing- As the name suggests, this method identifies activities in an organisation and allots cost of each of those activities as per the consumption. In this method overhead and indirect costs are also assigned. In this type of costing, all the costs of the various activities in an organization are identified, and then accordingly the costs are allocated to these activities. Then the costs that are accumulated in these activities are further assigned to the products on the basis of the activities that go into the production of these products and the number of resources that are consumed by these activities. 

Objectives of Cost Accounting 

• Determining the price of goods and services

• Controlling the cost of production, distribution and sales

• Classifying the costs

• Fixing the production standard

Advantages of Cost Accounting

• Unprofitable activities can be identified

• Fixing of prices

• Efficiency can be measured and improved

• Price determination

• Reduction of prices

• Stock control

• Efficiency measurement and improvement

• Identification of time and resource waste

• Aids Future planning

• Evaluation of the reasons for losses

Cost

The monetary value which a company spends in order to produce something is referred to as cost. In business, the amount of money is expressed in terms of cost which is spent on the production of a particular product. The expenditure as incurred during the production of a particular goods or service is also termed as cost. Thus, cost can be of various types such as factory cost, prime cost, sunk cost, indirect and direct cost etc. 

Cost does not include profit mark-up. If the product is sold at the same price at which it cost, then the cost price and the selling price would break even. If something like this happens it means that there is neither a profit nor a loss. 

From a buyer’s point of view, the cost of the product would be known as the price of the product. The price includes both the cost of production of the product and the mark-up cost which is added by the seller in order to produce a profit.

Costing

The technique and process in which the ascertaining of the cost is involved are referred to as the costing. It can be defined as a systematic process that is used to determine the unit cost of the output product or the service which is being rendered. It is a system that helps a company to determine its cost of production. Historical costing and standard costing are some methods followed in costing. Both the types of costs fixed and variable which are incurred in the whole production process are looked upon in this type of accounting.

While variable costs are assigned to the various activities according to the performance, it is termed as direct costing. Fixed costs, when assigned to activities irrespectively, it is termed as absorption costing. 

Conclusion 

Knowing costing, cost accounting and cost is of utmost importance in case of understanding accounting. When costing and accounting are applied together, it is termed as cost accountancy. This is the job of a cost accountant. The appropriate practice of this ensures the growth, development and profitability of a company or any business organisation.