Types of Cost Accounting

Cost accounting is a branch of accounting which deals with the classification, recording, and distribution of current and future costs. Cost Accounting is the most important method or process for a firm in today’s commercial environment. It is beneficial to both the organization’s management and its employees.

Cost Accounting

Cost accounting is a type of accounting that tracks all of the expenses of production, including both fixed and variable costs. The goal of cost accounting is to help management in making decisions which improve operations through effective cost management.

Types of Cost Accounting

There are many types of cost accounting which are given below.

Standard Costing

Standard costing provides standard costs to its cost of goods sold (COGS) and inventories, rather than actual expenses. The standard costs are essentially the budgeted amount, as they are based on the effective utilisation of labour and materials to create the goods or services under standard operating conditions. Despite the fact that standard costs are given to the goods, the corporation must pay the actual expenses. Variance analysis is the process of determining the difference between the standard (efficient) cost and the actual cost spent.

The variance is unfavourable if the variance analysis indicates that actual expenses are higher than expected. The variance is advantageous if it indicates that actual expenses are lower than expected.

Activity-Based Costing

By using activity-based costing (ABC), each department’s overhead costs are identified and assigned to certain cost objects like commodities or services. The ABC cost accounting system is based on activities, which are expressed as any event, unit of work, or job with a clear aim, like setting up production machines, creating items, delivering finished goods, or operating machines. These activities are also referred to as cost drivers, and they are the benchmarks on which overhead costs are allocated.

Overhead expenses are traditionally given based on a single generic measure, like machine hours. An activity analysis is carried out under ABC, and appropriate measures are identified as cost drivers. As a result, when managers analyse the cost and profitability of their company’s unique services or products, then ABC tends to be much more accurate and helpful.

Lean Accounting

Lean accounting’s objective is to improve an organization’s financial management process. 

Lean accounting is a branch of the lean manufacturing and production philosophy that has the stated goal of reducing waste while increasing productivity. Suppose, if an accounting department is able to reduce wasted time, staff can use that time more productively on value-added duties.

Marginal Costing

The effect of introducing one more unit into production on the cost of a product is considered marginal costing (also considered a cost-volume-profit analysis). It’s useful for making short-term financial decisions. Marginal costing can assist management in determining the impact of various cost and volume levels on operational profit. Management can use this type of analysis to learn about potentially profitable new items, sales pricing to set for existing products, and the impact of marketing activities.

Importance of Cost Accounting

Classification of Costs

Cost is a fairly broad concept that needs to be categorised in order to be useful. The recording and categorising of such costs are part of cost accounting.

Prime cost, direct cost, factory cost, and selling cost are examples of costs. This classification enables management to keep costs under control and determine the profitability of various operations and activities. It also aids in the computation of efficiency.

Cost Control

Controlling the cost of goods, labour, and numerous other overhead expenditures is key to running a successful firm. They are able to do so because of cost accounting.

Price Determination

The primary difference between fixed and variable costs is made in cost accounting. Management then uses this information to set product prices based on the product’s costs.

This enables management to choose the most appropriate pricing for the product or service, one that is neither too high nor too low.

There are other importances of cost accounting which are discussed below.

Costing helps the government in determining income tax and other government obligations. It also aids in the establishment of industry standards, as well as price setting, tariff schemes, and cost control.

The main goals of costing are cost control and efficiency enhancement. Both of these are extremely advantageous to the organisation. And at last, the benefit is passed on to the product or service’s customers.

Functions of Cost Accounting

There are many important functions of cost accounting which are given below.

Cost accounting determines the cost of production for each job, process, or work order by using various cost accounting methods, like job costing, process operation costing, contract costing, and so on, depending on the organization’s suitability and needs.

Cost accounting aids in the determination of production costs and the establishment of selling prices for a product, process, task, or activity. It also aids in the preparation of required tenders or quotations.

Cost accounting regulates costs by establishing criteria that are then compared to the actual. The difference between them is identified, and if needed, control measures are performed.

Conclusion

Cost accounting is a branch of accounting that deals with the classification, recording, and distribution of current and future costs. The goal of cost accounting is to help management in making decisions which improve operations through effective cost management. Prime cost, direct cost, factory cost, and selling cost are examples of costs. The main goals of costing are cost control and efficiency enhancement. Cost accounting regulates costs by establishing criteria that are then compared to the actual.

There are many types of cost accounting which are as follows’

1. standard costing
2. activity-based costing
3. lean accounting 
4. marginal costing