The process to determine a company’s total expenditure in production is cost accounting or costing. Costing is done by the company’s management internally. It supports several strategic decisions like short-term and long-term pricing of a product.
Cost accounting is a process to assess or estimate the cost of a manufactured product that involves a series of processes and different types of input resources that are used in a business. Several types of cost accounting techniques are followed in a business based on the different accounting variables.
Cost accounting is one of the most preferred career options after BCom. The types of cost, important costing methods, and techniques of costing are discussed in this article.
Types of Costs
The different types of costs that businesses have to incur are as follows -
Fixed expenses such as labour wages, rent of land etc. are the fixed costs in production. This cost has to be incurred by the producer irrespective of the level of output produced.
Expenses incurred in resources vary with the methodology as well as the level of production. These types of expenses are known as variable costs.
The expenses that have already been incurred and are not recoverable in future are known as sunk costs.
Opportunity cost in a business refers to the loss that the producer has to incur while choosing the production of one item over the other.
Important Cost Accounting Methods
There are several processes for finding out the costs of different natures. The different methods of cost accounting are as follows -
This method is followed in those production units that generally do not produce similar products. Here, costing is job-based or lot-based depending on the number of orders executed.
This method is followed for contracts, which are essentially large and complex jobs.
This method is followed where an agreed percentage is paid to the contractor over and above the actual cost incurred in a contract or project.
This procedure is followed in companies with repetitive production of similar jobs. Production is arranged in batches to suit production convenience.
This method is followed where production is a function of several distinct processes. The cost is a summation of all these processes.
Mass or repetitive production with multiple processes results in stocking semi-finished products. In these cases, this method is followed.
Manufacturers follow this process when they require to ascertain the cost of a single unit of product.
This method is followed to monitor service costs.
When the management wishes to ascertain the cost incurred by a specific department, it follows this method.
Cost accounting helps in pricing strategies. Short-term pricing generally considers the direct costs of production. However, long-term pricing always considers the indirect costs like the manufacturing and administrative overheads and depreciation over and above the direct costs of production. Thus, long-term price takes into account both fixed and variable cost components in a production process.
Techniques of Cost Accounting
Different techniques are used to analyse and ascertain costs. They are as follows -
This is the technique of recording and analysing costs when the process of production is fully or partially completed.
Standard costing is an estimation of what a business owner is expected to spend for a specific business or production process. This offers a reference point to a new business and enables it to prepare its budget.
Marginal costing or variable costing takes into account only the variable direct costs of producing a certain volume. This process does not consider the fixed costs of production. The purpose of this costing is to mitigate the difference between the total cost and the variable cost with the optimised volume of production.
Direct costing methods also use only variable costs for accounting and are used to determine short-term pricing strategies.
This accounting method is also known as full costing since all costs whether direct or indirect, fixed or variable, are considered.
The uniform costing technique is the latest and differs from all the other costing methods. It is a common undertaking of uniform costing principles between two or more large companies following the same nature of business. This costing principle occurs as a result of mutual agreement to bring national stability to the business and ensure profitability for all the companies.
Objectives of Cost Accounting
The overall goal of cost accounting is to benchmark processes for recording, batching, monitoring and budgeting expenses for major cost heads like production, service, overheads and salaries. The followings are the major objectives of cost accounting -
To assess the cost of different cross-functional departments of a company, factory etc.
To find out the cost of a unit product for optimising production.
To locate the costs of different processes and other operations engaged in production.
To find out the cost of wastage of materials, idling or under-utilisation of plants and types of machinery.
To determine the cost of a service.
Control cost on raw materials, consumables and finished goods inventory.
Supports cost audit to prevent malpractice or error.
Helps management in pricing strategies, planning and other critical decision-making exercises.
Helps management to prepare budgets and declare incentive or bonus plans, based on the company savings.
To motivate departmental managers to engage in cost reduction programs.
Helps in profit maximising.
To equip management with prompt numerical analysis of all micro and macro functions of the company.
Cost accounting is one of the best career options after BCom because it offers various opportunities to candidates. The BCom from Rathinam College of Arts and Science offered by Imarticus will give prospective candidates a perfect start to their careers.
The duration of this course is 3 years. After completing BCom from Rathinam, candidates come across various placement opportunities.
Visit the official site of Imarticus for more course-related details.