For any business, the first step before selling the products is to calculate the costing. This helps in strategically planning the production and managing the finances. To do so, the companies follow several processes depending on the needs and methods. This leads to the facilitation of making managerial decisions for cost accounting. However, before knowing the techniques of costing and types of costing methods, it is essential to understand the definition of cost accounting and its components. Let us help you understand these concepts better.
Cost accounting is defined as the process of taking into account all the costs involved in the production, processing and selling of any projects or products. Under this, a complete note is taken along with the analysis of the process. Cost accounting plays a key role in helping the company make cost-effective decisions. There are several methods and techniques of costing, followed by different types of organizations.
Oftentimes, one can get confused between cost accounting and financial accounting. However, these are two different aspects. Here are some of the key differentiators.
Traditional (financial) accounting is calculated by deducting the expenses from the total cost to calculate the profits. However, in the case of cost accounting, the complete process and production are made cost-effective by reducing the costs at every step and aspect.
In traditional accounting, the organization is viewed as a whole, whereas in cost accounting, the organization is segregated on several bases, including production and process units.
The techniques and methods of financial accounting are constant with all types of business. However, the methods and techniques of cost accounting vary depending on the types of businesses.
Elements of Cost
For any business or production unit, the costs can be majorly divided on the following basis. These include:
The further classification for these includes:
The several techniques of cost accounting play a key role in making managerial financial decisions. The different types of costing include:
Under the marginal costing techniques, only the variable costs for the additional units produced are considered. The fixed costs are not considered as they remain constant with change in the production process and quantity.
Under this technique of costing, the earlier costs of products are compared with the present cost. The variance that occurs in the costing helps calculate the cost-effectiveness of the product and even the profits.
Under this costing, all the direct costs levied in the production process, operations and project are charged. In contrast, the other indirect costs are left behind to calculate the profit and loss. This technique of costing varies slightly from marginal costing.
Under historical costing, all the previous accounts are taken into consideration and comparison is done with all these costs after the process of production is completed.
To facilitate the comparison, the same costing practices are followed throughout the production process.
This method involves the full costing process. Under this technique of cost management, all the costs throughout the production, processing and operation are taken into consideration.
The uniformity and guidance for costing are provided to the business by the Cost Accounting Standards Board (CASB) constituted by the Institute of Cost Accountants. This board has put forth 24 standards that help implement the cost strategies and the various elements of costs included.
1. What Are the Types of Costs Which Help in Cost Accounting Implementation?
Ans: The various types of costs for better analysis and understanding of types of costs include:
Fixed Costs: Even after changes in the production, process and operations, these costs remain constant. For example, the salaries of the employees in a manufacturing unit do not vary depending on the production.
Variable Cost: This type of cost varies with increment/decrement in production, process and operation.
Opportunity Cost: When the organization selects one option over the other, the cost so incurred is called opportunity cost.
Sunk Costs: The costs which cannot be recovered are called sunk costs. For example, the machinery cost incurred in the production of toys. These will not decrease or increase once the products are produced.
2. What are the Various Costing Methods?
Ans: The costing methods vary depending on the business and the industry. These include:
Job Costing: These are the costs which are incurred for a particular job.
Contract Costing: It is just like job costing, the only difference being the duration. The duration of contract costing is longer.
Unit Costing: These include the cost which occurs for a specific quantity.
Batch Costing: These include the cost which occurs for a batch of products with a fixed number of units.
Process Costing: Under this type of cost, one can easily distinguish the types of processes involved.
Operation Costing: This costing includes cost incurred for the types of services rendered.