COST ACCOUNTING is the process of calculating or measuring all the fixed or variable cost associated with the production of good. It helps the management to find out the overall cost it incurred in production process which will help us to estimate the cost and determine the sales price to find out the profit. Cost accounting is a very important aspect of accounting as it helps to analyse the cost and reduce the overall cost to increase the efficiency. The cost accounting is not been advised by GAAP it is just used for internal decision making.
There are number of cost associated in production process such as fixed cost, variable cost, direct cost, indirect cost, sunk cost and many more we will discuss all this later in this article .
There are number of elements associated for calculating cost . It includes:
1 Expenses {Direct , Indirect}
2 Labour {Direct, Indirect}
3 Material {Direct ,Indirect}
4 Overheads {Administration, factory, selling etc}
Importance of Cost Accounting
1 Help in decision making
Cost Accounting help in calculating the overall cost incurred in producing in item which helps the management to take crucial decisions related to reduction in cost , setting the sales price ,whether to reduce variable cost or fixed cost.
2 Help in calculating efficiency of workers
Cost Accounting helps to calculate the efficiency of workers which helps the management to allocate or provide the incentives and bonus.
3 Helps in comparison
It helps in comparing the various costs and volume
4 Help in reducing wastage
As you get to know about the overall cost of the product it will hep you to reduce the cost which are of no use.
How Cost Accounting is different from Management Accounting
1} Cost accounting mostly done for internal management, staff for decision making or internal working but financial accounting deals with providing the financial information to the users of firms such as lenders, stakeholders, management for making decisions such as investing, profit, loss etc.
2}The cost accounting is mostly used by manufacturing industries as they have to compute the cost of production while the financial accounting used to be done by all types of firm to manage their records.
3}Cost accounting helps to predict and forecast expenses hence it helps in budgeting but it is not possible in financial accounting.
4} Stock values in cost accounting is recorded at cost but in financial accounting it used to be calculated at net realisable value or value whichever is less.
5}Objective of cost accounting is to reduce or control the overall cost but in financial accounting main focus is on maintain records.
Types of Costs :
So far, we had studied what is cost accounting its importance and many more now let’s discuss what are cost and it’s types ? Costs are the expenses which are incurred in functioning of business. There are various types of different costs let us discuss here:
1 Variable cost
The cost which used to change with the change in level of production.
For ex: raw material {the price of raw material used to change if the production increases the cost of raw material will increase and if the production
will decrease the cost will decrease}
2 Fixed cost
The cost which remains unchanged or fixed regardless of level of production .We have to pay these cost even if we are producing or not.
For ex.: Rent of the Factory is fixed {you have to pay the rent if you are producing or not]
3 Direct Cost
The cost which is directly related to the production of finished goods .
For Ex.- If wheat is used in production of bread then the cost of wheat as raw material is considered as direct cost as it is directly related to the production process .
4 Indirect cost
It is also known as overhead cost is the cost which is not directly related to a product or project. These are cost calculated on overall basis and then distributed among the products on the allocation basis.
For ex.-Factory rent now the rent is not related to a particular product so we used to divide that expense among different activities on the allocation basis.
5 Opportunity cost
The cost of choosing the alternative option instead of the prior option
For Ex. You have 2 projects in which you can invest one is giving you 20000 profit but investment is 15000 and other is 30000 in which you have to invest 20000 so you have decided to opt option b so the cost of not choosing option 1 is opportunity cost .
6 Controllable Cost
The cost which are being controlled by the management by taking the actions such as budgeting or cost control.
For ex. Cost of advertising can be controlled by the management .
7 Uncontrollable cost
The cost which is not in the control of management we have to bear that in any situation .
For ex – The government tax or regulations we have to fulfil we cannot avoid them or control them
8 Sunk cost
As the name itself suggest sunk means the cost is being sunk and cannot be recovered it better be understood by an ex
For ex. – We invested in an project for rs.100000 and due to some unforeseen challenges the project is abandoned and we cannot recover the cost so the amount is sunk
9 Shut down cost
The cost which a business must have to bear even it is producing or not.
For ex- If we had shut down our business for some time for an renovation work then the cost of idle labours, rent of factory, security expenses and many more expenses we have to bear
10 Semi variable cost
The cost which is both variable and fixed tis cost used to be fixed till certain threshold and then fluctuate depending on the use
For ex-the bill of electricity is fixed upto certain amount but after that it used to fluctuate depends upon the use of electricity.
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