Costaccounting

FromWikipedia,thefreeencyclopedia

Costaccountingisaprocessofcollecting,recording,classifying,analyzing,summarizing,allocatingandevaluatingvariousalternativecoursesofaction&controlthecost.Itsgoalistoadvisethemanagementonthemost
appropriatecourseofactionbasedonthecostefficiencyandcapability.Costaccountingprovidesthedetailedcostinformationthatmanagementneedstocontrolcurrentoperationsandplanforthefuture.[1]
Sincemanagersaremakingdecisionsonlyfortheirownorganization,thereisnoneedfortheinformationtobecomparabletosimilarinformationfromotherorganizations.Instead,informationmustberelevantforaparticular
environment.Costaccountinginformationiscommonlyusedinfinancialaccountinginformation,butitsprimaryfunctionisforusebymanagerstofacilitatemakingdecisions.
Unliketheaccountingsystemsthathelpinthepreparationoffinancialreportsperiodically,thecostaccountingsystemsandreportsarenotsubjecttorulesandstandardsliketheGenerallyAcceptedAccounting
Principles(GAAP).Asaresult,thereiswidevarietyinthecostaccountingsystemsofthedifferentcompaniesandsometimesevenindifferentpartsofthesamecompanyororganization.

Contents
1
2
3
4
5
6
7

Origins
CostAccountingvsFinancialAccounting
Typesofcostaccounting
Elementsofcost
Classificationofcosts
Standardcostaccounting
Thedevelopmentofthroughputaccounting
7.1 Mathematicalformula
8 Activitybasedcosting
9 IntegratingEVAandProcessBasedCosting
10 Leanaccounting
11 Marginalcosting
12 Seealso
13 References
14 Furtherreading
15 Externallinks

Origins
Alltypesofbusinesses,whetherservice,manufacturingortrading,requirecostaccountingtotracktheiractivities.[1]Costaccountinghaslongbeenusedtohelpmanagersunderstandthecostsofrunningabusiness.Moderncost
accountingoriginatedduringtheindustrialrevolution,whenthecomplexitiesofrunningalargescalebusinessledtothedevelopmentofsystemsforrecordingandtrackingcoststohelpbusinessownersandmanagersmake
decisions.
Intheearlyindustrialage,mostofthecostsincurredbyabusinesswerewhatmodernaccountantscall"variablecosts"becausetheyvarieddirectlywiththeamountofproduction.Moneywasspentonlabor,rawmaterials,
powertorunafactory,etc.indirectproportiontoproduction.Managerscouldsimplytotalthevariablecostsforaproductandusethisasaroughguidefordecisionmakingprocesses.
Somecoststendtoremainthesameevenduringbusyperiods,unlikevariablecosts,whichriseandfallwithvolumeofwork.Overtime,these"fixedcosts"havebecomemoreimportanttomanagers.Examplesoffixedcosts
includethedepreciationofplantandequipment,andthecostofdepartmentssuchasmaintenance,tooling,productioncontrol,purchasing,qualitycontrol,storageandhandling,plantsupervisionandengineering.[2]Intheearly
nineteenthcentury,thesecostswereoflittleimportancetomostbusinesses.However,withthegrowthofrailroads,steelandlargescalemanufacturing,bythelatenineteenthcenturythesecostswereoftenmoreimportantthan
thevariablecostofaproduct,andallocatingthemtoabroadrangeofproductsledtobaddecisionmaking.Managersmustunderstandfixedcostsinordertomakedecisionsaboutproductsandpricing.

Forexample:Acompanyproducedrailwaycoachesandhadonlyoneproduct.Tomakeeachcoach,thecompanyneededtopurchase$60ofrawmaterialsandcomponents,andpay6laborers$40each.Therefore,totalvariable
costforeachcoachwas$300.Knowingthatmakingacoachrequiredspending$300,managersknewtheycouldn'tsellbelowthatpricewithoutlosingmoneyoneachcoach.Anypriceabove$300becameacontributiontothe
fixedcostsofthecompany.Ifthefixedcostswere,say,$1000permonthforrent,insuranceandowner'ssalary,thecompanycouldthereforesell5coachespermonthforatotalof$3000(pricedat$600each),or10coachesfor
atotalof$4500(pricedat$450each),andmakeaprofitof$500inbothcases.

CostAccountingvsFinancialAccounting
FinancialaccountingaimsatfindingoutresultsofaccountingyearintheformofProfitandLossAccountandBalanceSheet.CostAccountingaimsatcomputingcostofproduction/serviceinascientificmannerand
facilitatecostcontrolandcostreduction.
Financialaccountingreportstheresultsandpositionofbusinesstogovernment,creditors,investors,andexternalparties.
CostAccountingisaninternalreportingsystemforanorganizationsownmanagementfordecisionmaking.
Infinancialaccounting,costclassificationbasedontypeoftransactions,e.g.salaries,repairs,insurance,storesetc.Incostaccounting,classificationisbasicallyonthebasisoffunctions,activities,products,processandon
internalplanningandcontrolandinformationneedsoftheorganization.
Financialaccountingaimsatpresentingtrueandfairviewoftransactions,profitandlossforaperiodandStatementoffinancialposition(BalanceSheet)onagivendate.Itaimsatcomputingtrueandfairviewofthe
costofproduction/servicesofferedbythefirm.[3]

Typesofcostaccounting
Thefollowingaredifferentcostaccountingapproaches:
Standardcostaccounting
Leanaccounting
Activitybasedcosting
Resourceconsumptionaccounting
Throughputaccounting
Lifecyclecosting
Environmentalaccounting
Targetcosting

Elementsofcost
Basiccostelementsare:
1.Rawmaterials
2.labour
3.expenses/overhead
Material(Materialisaveryimportantpartofbusiness)
Directmaterial/Indirectmaterial
Labor
Directlabor/Indirectlabor
Overhead(Variable/Fixed)
ProductionorworksoverheadsFactoryStaff
AdministrationoverheadsOfficeStaff
SellingoverheadsCatalogues,Advertising,Exhibitions,SalesStaffCosts
Distributionoverheads
Maintenance&Repair(Officeequipment/Factorymachinery)
Supplies

UtilitiesGasElectricityWaterRates
OtherVariableExpenses
Salaries(PayrollWages,NIPAYEPensions)
Occupancy(Rent)
Depreciation(Machinery/OfficeEquipment)
OtherFixedExpenses
(Insomecompanies,machinecostissegregatedfromoverheadandreportedasaseparateelement)

Classificationofcosts
Classificationofcostmeans,thegroupingofcostsaccordingtotheircommoncharacteristics.Theimportantwaysofclassificationofcostsare:
1.ByElement:Therearethreeelementsofcostingi.e.material,laborandexpenses.
2.ByNatureorTraceability:DirectCostsandIndirectcosts.DirectCostsareDirectlyattributable/traceabletoCostobject.DirectcostsareassignedtoCostObject.IndirectCostsarenotdirectlyattributable/traceabletoCost
Object.Indirectcostsareallocatedorapportionedtocostobjects.
3.ByFunctions:production,administration,sellinganddistribution,R&D.
4.ByBehavior:fixed,variable,semivariable.Costsareclassifiedaccordingtotheirbehaviorinrelationtochangeinrelationtoproductionvolumewithingivenperiodoftime.FixedCostsremainfixedirrespectiveof
changesintheproductionvolumeingivenperiodoftime.Variablecostschangeaccordingtovolumeofproduction.Semivariablecostsarepartlyfixedandpartlyvariable.
5.Bycontrolability:controllable,uncontrollablecosts.Controllablecostsarethosewhichcanbecontrolledorinfluencedbyaconsciousmanagementaction.Uncontrollablecostscannotbecontrolledorinfluencedbya
consciousmanagementaction.
6.Bynormality:normalcostsandabnormalcosts.Normalcostsariseduringroutinedaytodaybusinessoperations.Abnormalcostsarisebecauseofanyabnormalactivityoreventnotpartofroutinebusinessoperations.
E.g.costsarisingoffloods,riots,accidentsetc.
7.ByTime:Historicalcostsandpredeterminedcosts.Historicalcostsarecostsincurredinthepast.Predeterminedcostsarecomputedinadvanceonbasisoffactorsaffectingcostelements.Example:StandardCosts.
8.ByDecisionmakingCosts:Thesecostsareusedformanagerialdecisionmaking.
Marginalcosts:Marginalcostisthechangeintheaggregatecostsduetochangeinthevolumeofoutputbyoneunit.
Differentialcosts:Thiscostisthedifferenceintotalcostthatwillarisefromtheselectionofonealternativetotheother.
Opportunitycosts:Itisthevalueofbenefitsacrificedinfavorofanalternativecourseofaction.
Relevantcost:Therelevantcostisacostwhichisrelevantinvariousdecisionsofmanagement.
Replacementcost:Thiscostisthecostatwhichexistingitemsofmaterialorfixedassetscanbereplaced.Thusthisisthecostofreplacingexistingassetsatpresentoratafuturedate.
Shutdowncost:Thesecostsarethecostswhichareincurrediftheoperationsareshutdownandtheywilldisappeariftheoperationsarecontinued.
Capacitycost:Thesecostsarenormallyfixedcosts.Thecostincurredbyacompanyforprovidingproduction,administrationandsellinganddistributioncapabilitiesinordertoperformvariousfunctions.
Sunkencost:costalreadyincurred
Othercosts

Standardcostaccounting
Inmoderncostaccountofrecordinghistoricalcostswastakenfurther,byallocatingthecompany'sfixedcostsoveragivenperiodoftimetotheitemsproducedduringthatperiod,andrecordingtheresultasthetotalcostof
production.Thisallowedthefullcostofproductsthatwerenotsoldintheperiodtheywereproducedtoberecordedininventoryusingavarietyofcomplexaccountingmethods,whichwasconsistentwiththeprinciplesof
GAAP(GenerallyAcceptedAccountingPrinciples).Italsoessentiallyenabledmanagerstoignorethefixedcosts,andlookattheresultsofeachperiodinrelationtothe"standardcost"foranygivenproduct.
Forexample:iftherailwaycoachcompanynormallyproduced40coachespermonth,andthefixedcostswerestill$1000/month,theneachcoachcouldbesaidtoincuranOperatingCost/overheadof$25=($1000/40).
Addingthistothevariablecostsof$300percoachproducedafullcostof$325percoach.
Thismethodtendedtoslightlydistorttheresultingunitcost,butinmassproductionindustriesthatmadeoneproductline,andwherethefixedcostswererelativelylow,thedistortionwasveryminor.
Forexample:iftherailwaycoachcompanymade100coachesonemonth,thentheunitcostwouldbecome$310percoach($300+($1000/100)).Ifthenextmonththecompanymade50coaches,thentheunitcost=
$320percoach($300+($1000/50)),arelativelyminordifference.

Animportantpartofstandardcostaccountingisavarianceanalysis,whichbreaksdownthevariationbetweenactualcostandstandardcostsintovariouscomponents(volumevariation,materialcostvariation,laborcost
variation,etc.)somanagerscanunderstandwhycostsweredifferentfromwhatwasplannedandtakeappropriateactiontocorrectthesituation.

Thedevelopmentofthroughputaccounting
Asbusinessbecamemorecomplexandbeganproducingagreatervarietyofproducts,theuseofcostaccountingtomakedecisionstomaximizeprofitabilitycameintoquestion.Managementcirclesbecameincreasinglyaware
oftheTheoryofConstraintsinthe1980s,andbegantounderstandthat"everyproductionprocesshasalimitingfactor"somewhereinthechainofproduction.Asbusinessmanagementlearnedtoidentifytheconstraints,they
increasinglyadoptedthroughputaccountingtomanagethemand"maximizethethroughputdollars"(orothercurrency)fromeachunitofconstrainedresource.Throughputaccountingaimstomakethebestuseofscarce
resources(bottleneck)ina(JIT)Justintimeenvironment.[4]

Mathematicalformula

Activitybasedcosting
Activitybasedcosting(ABC)isasystemforassigningcoststoproductsbasedontheactivitiestheyrequire.Inthiscase,activitiesarethoseregularactionsperformedinsideacompany.[5]"Talkingwithcustomerregarding
invoicequestions"isanexampleofanactivityinsidemostcompanies.
CompaniesmaybemovedtoadoptABCbyaneedtoimprovecostingaccuracy,thatis,understandbetterthetruecostsandprofitabilityofindividualproducts,services,orinitiatives.ABCgetsclosertotruecostsintheseareas
byturningmanycoststhatstandardcostaccountingviewsasindirectcostsessentiallyintodirectcosts.Bycontrast,standardcostaccountingtypicallydeterminessocalledindirectandoverheadcostssimplyasapercentageof
certaindirectcosts,whichmayormaynotreflectactualresourceusageforindividualitems.
UnderABC,accountantsassign100%ofeachemployee'stimetothedifferentactivitiesperformedinsideacompany(manywillusesurveystohavetheworkersthemselvesassigntheirtimetothedifferentactivities).The
accountantthencandeterminethetotalcostspentoneachactivitybysummingupthepercentageofeachworker'ssalaryspentonthatactivity.
Acompanycanusetheresultingactivitycostdatatodeterminewheretofocustheiroperationalimprovements.Forexample,ajobbasedmanufacturermayfindthatahighpercentageofitsworkersarespendingtheirtime
tryingtofigureoutahastilywrittencustomerorder.Via(ABC)Activitybasedcosting,theaccountantsnowhaveacurrencyamountpeggedtotheactivityof"ResearchingCustomerWorkOrderSpecifications".Senior
managementcannowdecidehowmuchfocusormoneytobudgetforresolvingthisprocessdeficiency.Activitybasedmanagementincludes(butisnotrestrictedto)theuseofactivitybasedcostingtomanageabusiness.
While(ABC)Activitybasedcostingmaybeabletopinpointthecostofeachactivityandresourcesintotheultimateproduct,theprocesscouldbetedious,costlyandsubjecttoerrors.
Asitisatoolforamoreaccuratewayofallocatingfixedcostsintoproduct,thesefixedcostsdonotvaryaccordingtoeachmonth'sproductionvolume.Forexample,aneliminationofoneproductwouldnoteliminatethe
overheadorevendirectlaborcostassignedtoit.Activitybasedcosting(ABC)betteridentifiesproductcostinginthelongrun,butmaynotbetoohelpfulindaytodaydecisionmaking.

IntegratingEVAandProcessBasedCosting
Recently,MocciaroLiDestri,Picone&Min(2012).[6]proposedaperformanceandcostmeasurementsystemthatintegratestheEconomicValueAddedcriteriawithProcessBasedCosting(PBC).TheEVAPBCmethodology
allowsustoimplementtheEVAmanagementlogicnotonlyatthefirmlevel,butalsoatlowerlevelsoftheorganization.EVAPBCmethodologyplaysaninterestingroleinbringingstrategybackintofinancialperformance
measures.

Leanaccounting

Leanaccounting[7]hasdevelopedinrecentyearstoprovidetheaccounting,control,andmeasurementmethodssupportingleanmanufacturingandotherapplicationsofleanthinkingsuchashealthcare,construction,insurance,
banking,education,government,andotherindustries.
TherearetwomainthrustsforLeanAccounting.Thefirstistheapplicationofleanmethodstothecompany'saccounting,control,andmeasurementprocesses.Thisisnotdifferentfromapplyingleanmethodstoanyother
processes.Theobjectiveistoeliminatewaste,freeupcapacity,speeduptheprocess,eliminateerrors&defects,andmaketheprocessclearandunderstandable.Thesecond(andmoreimportant)thrustofLeanAccountingisto
fundamentallychangetheaccounting,control,andmeasurementprocessessotheymotivateleanchange&improvement,provideinformationthatissuitableforcontrolanddecisionmaking,provideanunderstandingof
customervalue,correctlyassessthefinancialimpactofleanimprovement,andarethemselvessimple,visual,andlowwaste.LeanAccountingdoesnotrequirethetraditionalmanagementaccountingmethodslikestandard
costing,activitybasedcosting,variancereporting,costpluspricing,complextransactionalcontrolsystems,anduntimely&confusingfinancialreports.Thesearereplacedby:
leanfocusedperformancemeasurements
simplesummarydirectcostingofthevaluestreams
decisionmakingandreportingusingaboxscore
financialreportsthataretimelyandpresentedin"plainEnglish"thateveryonecanunderstand
radicalsimplificationandeliminationoftransactionalcontrolsystemsbyeliminatingtheneedforthem
drivingleanchangesfromadeepunderstandingofthevaluecreatedforthecustomers
eliminatingtraditionalbudgetingthroughmonthlysales,operations,andfinancialplanningprocesses(SOFP)
valuebasedpricing
correctunderstandingofthefinancialimpactofleanchange
Asanorganizationbecomesmorematurewithleanthinkingandmethods,theyrecognizethatthecombinedmethodsofleanaccountinginfactcreatesaleanmanagementsystem(LMS)designedtoprovidetheplanning,the
operationalandfinancialreporting,andthemotivationforchangerequiredtoprosperthecompany'songoingleantransformation.

Marginalcosting
Thecostvolumeprofitanalysisisthesystematicexaminationoftherelationshipbetweensellingprices,sales,productionvolumes,costs,expensesandprofits.Thisanalysisprovidesveryusefulinformationfordecisionmaking
inthemanagementofacompany.Forexample,theanalysiscanbeusedinestablishingsalesprices,intheproductmixselectiontosell,inthedecisiontochoosemarketingstrategies,andintheanalysisoftheimpactonprofits
bychangesincosts.Inthecurrentenvironmentofbusiness,abusinessadministrationmustactandtakedecisionsinafastandaccuratemanner.Asaresult,theimportanceofcostvolumeprofitisstillincreasingastimepasses.
CONTRIBUTIONMARGIN
Arelationshipbetweenthecost,volumeandprofitisthecontributionmargin.Thecontributionmarginistherevenueexcessfromsalesovervariablecosts.Theconceptofcontributionmarginisparticularlyusefulinthe
planningofbusinessbecauseitgivesaninsightintothepotentialprofitsthatabusinesscangenerate.ThefollowingchartshowstheincomestatementofacompanyX,whichhasbeenpreparedtoshowitscontributionmargin:
Sales

$1,000,000

()VariableCosts

$600,000

ContributionMargin

$400,000

()FixedCosts

$300,000

IncomefromOperations $100,000
CONTRIBUTIONMARGINRATIO
Thecontributionmargincanalsobeexpressedasapercentage.Thecontributionmarginratio,whichissometimescalledtheprofitvolumeratio,indicatesthepercentageofeachsalesdollaravailabletocoverfixedcostsandto
provideoperatingrevenue.ForthecompanyFusion,Inc.thecontributionmarginratiois40%,whichiscomputedasfollows:

Thecontributionmarginratiomeasurestheeffectonoperatingincomeofanincreaseoradecreaseinsalesvolume.Forexample,assumethatthemanagementofFusion,Inc.isstudyingtheeffectofadding$80,000insales
orders.Multiplyingthecontributionmarginratio(40%)bythechangeinsalesvolume($80,000)indicatesthatoperatingincomewillincrease$32,000ifadditionalordersareobtained.Tovalidatethisanalysisthetablebelow
showstheincomestatementofthecompanyincludingadditionalorders:
Sales

$1,080,000

()VariableCosts

$648,000(1,080,000x60%)

ContributionMargin

$432,000(1,080,000x40%)

()FixedCosts

$300,000

IncomefromOperations $132,000
Variablecostsasapercentageofsalesareequalto100%minusthecontributionmarginratio.Thus,intheaboveincomestatement,thevariablecostsare60%(100%40%)ofsales,or$648,000($1,080,000X60%).Thetotal
contributionmargin$432,000,canalsobecomputeddirectlybymultiplyingthesalesbythecontributionmarginratio($1,080,000X40%).

Seealso
Accountancy
Costoverrun
Fixedassetturnover
Managementaccounting
ITCostTransparency
Kaizencosting
Profitmodel

References
1.PrinciplesofCostAccountingEdwardJ.VanderbeckGoogleBooks.Books.google.co.uk.Retrieved20130301.
2.Performancemanagement,Paperf5.KapalanpublishingUK.Pg3
3.CostandManagementAccounting.Intermediate.ICA.p.15.
4.Performancemanagement,Paperf5.KapalanpublishingUK.Pg17
5.Performancemanagement,Paperf5.KaplanpublishingUK.Pg6
6.MocciaroLiDestriA.,PiconeP.M.&MinA.(2012),BringingStrategyBackintoFinancialSystemsofPerformanceMeasurement:IntegratingEVAandPBC,BusinessSystemReview,Vol1.,Issue1.pp.85102.
7.Maskell&Baggaley(December19,2003)."PracticalLeanAccounting".ProductivityPress,NewYork,NY.

1.CostAccounting,3rdeditionMd.OmarFaruk,SohelAhmed,SharifHossain.

Furtherreading
Maher,LanenandRahan,FundamentalsofCostAccounting,1stEdition(McGrawHill2005).
Horngren,DatarandFoster,CostAccountingAManagerialEmphasis,11thedition(PrenticeHall2003).
Kaplan,RobertS.andBruns,W.AccountingandManagement:AFieldStudyPerspective(HarvardBusinessSchoolPress,1987)ISBN0875841864
Nicholson,JeromeLee,andJohnFrancisDeemsRohrbach.Costaccounting(https://archive.org/stream/costaccounting00nichuoft#page/n3/mode/2up).NewYork:RonaldPress,1919.
Blocher,Stout,JurasandCokins,CostManagementAStrategicEmphasis,7thEdition(McGrawHill2016).

Externallinks
AccountingSystems,introductiontoCostAccounting,ethicsandrelationshiptoGAAP.(http://www.loscostos.info/financialaccounting/accountingsystems.html)

WikimediaCommonshas

NationalConferenceonCollegeCostAccounting(http://www.costaccounting.org)

mediarelatedtoCost
accounting.

Retrievedfrom"https://en.wikipedia.org/w/index.php?title=Cost_accounting&oldid=721061102"
Categories: Costs Managementaccounting
Thispagewaslastmodifiedon19May2016,at15:22.
TextisavailableundertheCreativeCommonsAttributionShareAlikeLicenseadditionaltermsmayapply.Byusingthissite,youagreetotheTermsofUseandPrivacyPolicy.Wikipediaisaregisteredtrademarkofthe
WikimediaFoundation,Inc.,anonprofitorganization.