What is Cost Accounting?
Cost accounting is a method of recording, concisely constructing, analyzing, and understanding a company's expenses due to some investment, capital requirements, process, etc. It is a business strategy meant to give insight into the company's expenditures, leading to greater cost efficiency, pre-planning, and finance decisions. Another advantage of cost accounting is that it provides transparency to the company regarding its financial activities. This practice makes it possible for the management to look into which areas require cost-cutting and which ones need greater investment. This technique leads to a better vision for the organization. This article will explore the meaning of cost, the meaning of costing, cost accounting, and other properties.
Features of Cost Accounting
The following are a few features of cost accounting:
It is a branch of accounting
Acts as the basis for budget-related decisions for the management
It helps to determine a standard pattern of costing
It is an excellent tool for analyzing the efficiency of a unit of the business. It discloses the level of financial wastage caused in each unit
Types of Cost Accounting
The following are the types of cost accounting:
Costing Based on Activity
Lean Accounting
Standard Accounting
Marginal Costing
Standard accounting is a costing method where the firm determines costs by comparing the actual expenditures on a certain activity compared to the desired expenditure.
Marginal costing is a technique that involves diving all costs into fixed and variable expenses. Fixed costs are those expenses of a company that are not affected by the change in profits incurred. Variable costs are directly proportional to the level of production activity in the firm.
Importance of Cost Accounting
Cost accounting is an important activity in the department of finance of any facility. This technique provides a lot of insight into the economic activity levels of the organization. Following are a list of advantages of cost accounting:
Improves financial efficiency
Identifies activities that run in losses
Helps in price reduction and fixing of prices
Keeps an account of the stock
Helps to understand and analyze losses
Aids in planning the future financial course of the firm
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Meaning of Cost
What is the meaning of cost, and how do we determine the cost of something? The cost of a good or service is essentially the valuation or the resources given in exchange for that good or service. In industrial terms, the cost is the value in the money of a commodity, the materials involved, the efforts, risks, and opportunities created altogether. Cost is also the investment made for producing a product. It is noteworthy that while the value of a commodity is a measure of its usefulness, the cost is strictly calculated in terms of money.
Cost is often an umbrella term for several classifications that it holds. These classifications are as follows:
Prime cost
Sunk cost
Factory cost
Direct cost
Indirect cost
It is important to mention the type of cost in the balance sheet for better interpretation.
Meaning of Costing
Costing is simply the method for ascertaining the cost of goods and services and other business elements.
Costing is essentially a technique, and as with any other process, it follows a certain procedure and several rules and regulations. Some of the standard principles followed in ascertaining costs are historical costs, standard costs, etc.
Some Important Points to Remember
Direct costing is the assignment of cost according to the increasing and decreasing level of activity.
On the contrary, the assignment of costs irrespective of the activity levels is known as absorption costing.
Solved Examples
Q. What is an Overhead Cost in Accounting?
Answer: Overhead costs are those expenses of a company or business which are ongoing but not directly related to the service or commodity that the business provides. For example, if a company runs a service-based enterprise such as a restaurant, then, other than the costs for providing the hospitality, there will be additional expenditures such as rent, maintenance, and insurance. The accounting of these costs is crucial for budget management and for determining the price of the company's services.
FAQs on Cost, Costing, and Cost Accounting: Key Concepts
1. What does a cost accountant do?
As we have seen, cost accounting is a method of tabulating the expenditures of a company in such a way that it is concise, can undergo easy interpretation, and help in analyzing the financial activities of the organization better. While studying this chapter, you might ask yourself, what does a cost accountant do? Well, a cost accountant is a person responsible for all the tasks mentioned above. A person employed in this position has responsibilities ranging from reducing the company's expenses and increasing profits to determining the correct cost for a product or service and planning the yearly budget. It is quite a demanding job!
2. What is a historical cost in the language of accounting?
You might have come across the term historical cost when dealing with the concept of cost accounting. Historical cost is a concept in commerce where we consider the original cost of the capital, commodity or service as it was in the beginning when the company acquired it. In simple words, it is a measure of value which we put in the balance sheet, and this value is the price of the product or service as it was in the beginning. It is a value that generally doesn't change and is true for fixed assets. Fixed assets are those assets of a company that do not change with an increase or decrease in profits. Under generally accepted accounting practices (GAAP), fixed assets fall under historical costs in the USA.
