For any business, the first step before selling the products is to calculate the cost. 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.
What is Cost Accounting?
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.
Difference Between Cost Accounting and Financial Accounting
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:
Standards of Cost Accounting
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.
What is Costing ?
The technique and practice of recognising input costs at each stage of manufacturing is referred to as 'costing.' The firm uses many procedures or methods in costing, which include basic concepts and a set of rules that must be followed in order to regulate the entire process and calculate the cost of a product or service.
Cost accounting is a type of managerial accounting that tries to capture a company's overall production cost by monitoring both variable and fixed costs, such as a leasing charge. Cost accounting is used by a company's internal management department to define both variable and fixed expenses connected with the manufacturing process.
Cost accounting includes several forms of costs like Fixed costs, Operating costs, Direct costs, Variable costs, Indirect costs
Different Techniques of Costing
Marginal Costing - The premise of marginal costing is to divide all costs into fixed and variable costs.Fixed costs are unrelated to production levels. As the name implies, these costs stay constant regardless of manufacturing volume.Variable expenses fluctuate according to production levels. They are proportionate in every way. The variable cost per unit, on the other hand, remains constant.In marginal costing, we solely take these variable expenses into account when determining production costs.
Standard Costing - Standard costing is a process in which a company compares the expenses incurred for the manufacture of goods to the expenditures that should have been incurred.In essence, it is a comparison of actual costs vs conventional expenses. Variances are the discrepancies between the two.
Historical Costing - Historical costing is the process of determining and recording costs after they have occurred. It serves as a record of what has occurred and, as a result, is a postmortem of the actual costs.
Direct Costing - All direct expenses are charged to operations, processes, or products, whereas all indirect costs are written off against profits in the period in which they occur.
Absorption Costing - There is no distinction between fixed and variable costs in absorption costing. In addition, all costs, whether fixed or variable, are taken into account when calculating the cost of production. Full costing is another name for absorption costing.
Uniform Accounting - Uniform costing, unlike marginal costing, is not a different approach to cost accounting. It is one of the most recent costing and cost control approaches. It refers to all or many units in the same industry accepting and adhering to the same costing concepts and methods by mutual agreement.