Cost Accounting Essay

OriginsAll types of tradees, whether service, manufacturing or trading, require toll accountancy to track their activities.1 represent invoice has long been used to help managers follow the approach of streamlet a business. Modern address story originated during the industrial revolution, when the complexities of running a large ordered series business led to the development of trunks for enter and track bell to help business owners and managers make decisions. In the early industrial age, most of the damage incurred by a business were what modern accountants ejaculate variable be because they varied lineally with the amount of production.citation mandatory M angiotensin converting enzymey was fatigued on labor, raw materials, power to run a factory, etc. in direct proportion to production. Managers could simply innate the variable court for a product and use this as a rough guide for decision- devising surgical processes. slightly prices tend to remain the kindred even during busy designs, foreign variable follows, which rise and fall with gaudiness of work. Over clock, these headstrong apostrophizes run through become more important to managers.Examples of doctor be accommodate the depreciation of plant and equipment, and the represent of de spark offments such as maintenance, alikeling, production reckon, purchasing, woodland oblige, storage and handling, plant supervision and engineering.2 In the early nineteenth century, these make ups were of little splendour to most businesses. However, with the growth of railroads, steel and large scale manufacturing, by the late nineteenth century these costs were often more important than the variable cost of a product, and allocating them to a broad clip of products lead to bad decision making. Managers moldiness understand fixed costs in order to make decisions about products and price.For example A caller produced rail authority tutores and had only whiz product. To make individually coach, the comp any leaseed to purchase $60 of raw materials and components, and pay 6 laborers $40 severally. thitherfore, total variable cost for each coach was $ 3 hundred. Knowing that making a coach required spending $300, managers knew they couldnt make out below that determine without losing money on each coach. Any price above $300 became a contri stillion to the fixed costs of the company. If the fixed costs were, say, $ grand piano per month for rent, insurance and owners salary, the company could therefore sell 5 coaches per month for a total of $3000 (priced at $600 each), or 10 coaches for a total of $4 calciferol (priced at $450 each), and make a profit of$500 in both cases. apostrophize Accounting vs Financial Accounting analyze also Financial explanationFinancial accountancy aims at conclusion out results of accounting year in the form of Profit and harm Account and Balance Sheet. be Accounting aims at computing cost of production/servic e in a scientific manner and hasten cost control and cost reduction. Financial accounting reports the results and position of business to government, creditors, investors, and external parties. exist Accounting is an indispensable reporting system for an formations own watchfulness for decision making. In financial accounting, cost salmagundi ground on type of transactions, e.g. salaries, repairs, insurance, stores etc. In cost accounting, classification is basically on the cornerstone of functions, activities, products, process and on internal planning and control and teaching needs of the organization. Financial accounting aims at presenting true and fair view of transactions, profit and loss for a period and Statement of financial position (Balance Sheet) on a given date. It aims at computing true and fair view of the cost of production/ operate offered by the regular.3(In some companies, machine cost is segregated from strike and account as a separate element)Classif ication of costsClassification of cost means, the grouping of costs according to their common characteristics. The important ways of classification of costs ar 1. By Element There be three elements of cost i.e. material, labor and expenses. 2. By Nature or TraceabilityDirect be and confirmatory be. Direct be atomic number 18 Directly attributable/trackable to Cost Object. Direct costs ar assigned to Cost Object. Indirect be are non directly attributable/traceable to Cost Object. Indirect costs are allocated or apportioned to cost objects. 3. By Functions production,administration, selling and diffusion, R&D. 4. By Behavior fixed, variable, semi-variable. Costs are classify according to their behavior in telling to budge in relation to production volume within given period of cartridge holder. Fixed Costs remain fixed irrespective of changes in the production volume in given period of time. Variable costs change according to volume of production. Semi-variable Costs co sts are partly fixed and partly variable. 5. By control ability controllable, uncontrollable costs. Controllable costs are those which suffer be controlled or influenced by a conscious charge action. difficult costs toilettenot be controlled or influenced by a conscious anxiety action. 6. By normality normal costs and abnormalcosts. Normal costs turn up during routine day-to-day business operations. Abnormal costs arise because of any abnormal activity or event not part of routine business operations. E.g. costs arising of floods, riots, accidents etc. 7. By Time historic Costs and Predetermined costs. Historical costs are costs incurred in the past. Predetermined costs are computed in advance on basis of factors affecting cost elements. Example example Costs. 8. By Decision making Costs These costs are used for managerial decision making. peripheral Costs Marginal cost is the change in the aggregate costs due to change in the volume of output by one unit. Differential Costs This cost is the difference in total cost that will arise from the selection of one alternative to the other.Opportunity Costs It is the value of benefit sacrificed in favor of an alternative course of action. relevant Cost The relevant cost is a cost which is relevant in various decisions of steering. Replacement Cost This cost is the cost at which existing items of material or fixed assets keister be replaced. Thus this is the cost of replacing existing assets at present or at a future date. Shutdown CostThese costs are the costs which are incurred if the operations are shut down and they will disappear if the operations are continued. Capacity Cost These costs are commonly fixed costs. The cost incurred by a company for providing production, administration and selling and distribution capabilities in order to perform various functions.Other CostsStandard cost accountingIn modern cost account of preserve historical costs was egressn further, by allocating the companys fixed costs over a given period of time to the items produced during that period, and recording the result as the total cost of production. This allowed the full cost of products that were not sold in the period they were produced to be recorded in memorandum using a variety of complex accounting methods, which was consistent with the principles of generally accepted accounting principles (Generally Accepted Accounting Principles). It also essentially enabled managers to ignore the fixed costs, and font at the results of each period in relation to the tired cost for any given product. For example if the railway coach company normally produced 40 coaches per month, and the fixed costs were still $1000/month, then each coach could be said to incur an Operating Cost/overhead of $25 =($1000 /40). Adding this to the variable costs of $300 per coach produced a full cost of $325 per coach.This method tended to slightly distort the resulting unit cost, but in mass-production industries that d o one product line, and where the fixed costs were comparatively low, the distortion was truly minor. For example if the railway coach company made 100 coaches one month, then the unit cost would become $310 per coach ($300 + ($1000 / 100)). If the next month the company made 50 coaches, then the unit cost = $320 per coach ($300 + ($1000 / 50)), a relatively minor difference. An important part of standard cost accounting is a variance compend, which breaks down the variation between actual cost and standard costs into various components (volume variation, material cost variation, labor cost variation, etc.) so managers can understand why costs were different from what was plan and take appropriate action to correct the situation. The development of throughput accounting master(prenominal) denomination Throughput accountingAs business became more complex and began producing a greater variety of products, the use of cost accounting to make decisions to increase favorableness cam e into question. Management circles became increasingly aware of the Theory of Constraints in the 1980s, and began to understand that every production process has a limiting factor somewhere in the chain of production. As business management learned to account the constraints, they increasingly adopted throughput accounting to manage them and maximize the throughput dollars (or other currency) from each unit of constrained resource. Throughput accounting aims to make the best use of unusual resources(bottle neck) in a JIT environment.4Mathematical formulaActivity-based costMain article Activity-based costingActivity-based costing (ABC) is a system for assigning costs to products based on the activities they require. In this case, activities are those regular actions performed inside a company.5 talking with guest regarding invoice questions is an example of an activity inside most companies. Companies whitethorn be moved to adopt ABC by a need to improve costing accuracy, that is , understand better the true costs and profitability ofindividual products, services, or initiatives. ABC gets closer to true costs in these areas by turning many costs that standard cost accounting views as indirect costs essentially into direct costs. By contrast, standard cost accounting typically determines so-called indirect and overhead costs simply as a percentage of certain direct costs, which whitethorn or may not reflect actual resource customs for individual items. Under ABC, accountants assign 100% of each employees time to the different activities performed inside a company (many will use surveys to have the workers themselves assign their time to the different activities).The accountant then can determine the total cost spent on each activity by summing up the percentage of each workers salary spent on that activity. A company can use the resulting activity cost data to determine where to focus their operational improvements. For example, a job-based manufacturer may find that a high percentage of its workers are spending their time trying to figure out a hastily written customer order. Via ABC, the accountants now have a currency amount pegged to the activity of Researching guest Work Order Specifications. Senior management can now try how much focus or money to budget for resolving this process deficiency. Activity-based management includes (but is not restricted to) the use of activity-based costing to manage a business.While ABC may be able to pinpoint the cost of each activity and resources into the ultimate product, the process could be tedious, costly and caseful to errors. As it is a tool for a more accurate way of allocating fixed costs into product, these fixed costs do not leave according to each months production volume. For example, an elimination of one product would not eliminate the overhead or even direct labor cost assigned to it. ABC better identifies product costing in the long run, but may not be too helpful in day-to-d ay decision-making.Integrating EVA and Process Based beRecently, Mocciaro Li Destri, Picone & Min (2012).6 proposed a performance and cost measurement system that integrates the Economic Value Added criteria with Process Based Costing (PBC). The EVA-PBC methodology allows us to implement the EVA management logic not only at the firm level, but also at lower levels of the organization. EVA-PBC methodology plays an interesting character in bringing strategy back into financial performance measures. range accountingMain article Lean accountingLean accounting7 has positive in recent years to deliver the goods the accounting, control, and measurement methods supporting disceptation manufacturing and other applications of heel thinking such as healthcare, construction, insurance, banking, education, government, and other industries. There are two main gluts for Lean Accounting. The first is the application of topple methods to the companys accounting, control, and measurement proc esses. This is not different from applying lean methods to any other processes. The objective is to eliminate waste, free up capacity, speed up the process, eliminate errors & defects, and make the process clear and understandable.The second (and more important) thrust of Lean Accounting is to fundamentally change the accounting, control, and measurement processes so they do lean change & improvement, provide tuition that is suitable for control and decision-making, provide an sense of customer value, correctly assess the financial impact of lean improvement, and are themselves frank, visual, and low-waste. Lean Accounting does not require the traditional management accounting methods like standard costing, activity-based costing, variance reporting, cost-plus pricing, complex transactional control systems, and untimely & confusing financial reports. These are replaced bylean-focused performance measurementssimple summary direct costing of the value streamsdecision-making and re porting using a box scorefinancial reports that are timely and presented in plainly English that everyone can understand radical simplification and elimination of transactional control systems by eliminating the need for them driving lean changes from a deep understanding of the value created for the customers eliminating traditional budgeting through monthly gross revenue, operations, and financial planning processes (SOFP) value-based pricingcorrect understanding of the financial impact of lean change As an organization becomes more mature with lean thinking and methods, they recognize that the feature methods of lean accounting in fact creates a lean management system (LMS) designed to provide the planning, theoperational and financial reporting, and the motivation for change required to prosper the companys on-going lean transformation.Marginal costing gossip also Cost-Volume-Profit Analysis and Marginal costThe cost-volume-profit analysis is the organized examination of the birth between selling prices, gross revenue, production volumes, costs, expenses and profits. This analysis provides very useful culture for decision-making in the management of a company. For example, the analysis can be used in establishing gross sales prices, in the product fluff selection to sell, in the decision to choose marketing strategies, and in the analysis of the impact on profits by changes in costs. In the on-line(prenominal) environment of business, a business administration must act and take decisions in a fast and accurate manner. As a result, the importance of cost-volume-profit is still increasing as time passes.CONTRIBUTION MARGINA relationship between the cost, volume and profit is the portion molding. The piece bank is the revenue excess from sales over variable costs. The concept of contribution valuation reserve is particularly useful in the planning of business because it gives an brainstorm into the potential profits that a business can generate. The following map shows the income statement of a company X, which has been prepared to show its contribution circumference sales$1,000,000(-) Variable Costs$600,000Contribution Margin$400,000(-) Fixed Costs$300,000Income from Operations$100,000CONTRIBUTION MARGIN RATIOThe contribution margin can also be expressed as a percentage. The contribution margin ratio, which is sometimes called the profit-volumeratio, indicates the percentage of each sales dollar available to wipe fixed costs and to provide operating revenue. For the company Fusion, Inc. the contribution margin ratio is 40%, which is computed as followsThe contribution margin ratio measures the military group on operating income of an increase or a decrease in sales volume. For example, assume that the management of Fusion, Inc. is studying the effect of adding $80,000 in sales orders. Multiplying the contribution margin ratio (40%) by the change in sales volume ($80,000) indicates that operating income will increase $ 32,000 if additional orders are obtained. To corroborate this analysis the table below shows the income statement of the company including additional ordersSales$1,080,000(-) Variable Costs$648,000 (1,080,000 x 60%)Contribution Margin$432,000 (1,080,000 x 40%)(-) Fixed Costs$300,000Income from Operations$132,000Variable costs as a percentage of sales are equal to 100% disconfirming the contribution margin ratio. Thus, in the above income statement, the variable costs are 60% (100% 40%) of sales, or $648,000 ($1,080,000 X 60%). The total contribution margin $432,000, can also be computed directly by multiplying the sales by the contribution margin ratio ($1,080,000 X 40%).See alsoAccountancyCost overrunFixed asset derangementManagement accountingIT Cost TransparencyKaizen costingProfit modelReferences1. Principles of Cost Accounting Edward J. Vanderbeck Google Books. Books.google.co.uk. Retrieved 2013-03-01. 2. Performance management, newspaper f5. Kapalan publishing UK. Pg 3 3. Cost and Management Accounting. Intermediate. ICA. p. 15. 4. Performance management, Paper f5. Kapalan publishing UK. Pg 17 5. Performance management, Paper f5. Kaplan publishing UK. Pg 6 6. Mocciaro Li Destri A., Picone P. M. & Min A. (2012), Bringing Strategy game into Financial Systems of Performance Measurement Integrating EVA and PBC, Business System Review, Vol 1., come to the fore 1. pp.85-102. 7. Maskell & Baggaley (December 19, 2003). Practical Lean Accounting. Productivity Press, New York, NY. Books and journalsMaher, Lanen and Rahan, Fundamentals of Cost Accounting, 1st Edition (McGraw-Hill 2005). Horngren, Datar and Foster, Cost Accounting A Managerial Emphasis, eleventh edition (Prentice Hall 2003). Consortium for Advanced Manufacturing-InternationalKaplan, Robert S. and Bruns, W. Accounting and Management A Field Study Perspective (Harvard Business School Press, 1987) ISBN 0-87584-186-4 Sapp, Richard, David Crawford and Steven Rebishcke phrase surname? Journal of Bank Cost and Management Accounting (Volume 3, piece 2), 1990. Author(s)? Article title? Journal of Bank Cost and Management Accounting (Volume 4, Number 1), 1991. External linksAccounting Systems, introduction to Cost Accounting, ethics and relationship to GAAP.National Conference on College Cost AccountingCost accounting is a process of collecting, analyzing, summarizing and evaluating various alternative courses of action. Its goal is to advise the management on the most appropriate course of action based on the cost efficiency and capability. Cost accounting provides the detailed cost information that management needs to control current operations and plan for the future.1 Since managers are making decisions only for their own organization, there is no need for the information to be comparable to similar information from other organizations. Instead, information must be relevant for a particular environment.Cost accounting information iscommonly used in financial accounting information, but its primary quill function is for use by managers to facilitate making decisions. Unlike the accounting systems that help in the preparation of financial reports periodically, the cost accounting systems and reports are not subject to rules and standards like the Generally Accepted Accounting Principles. As a result, there is wide variety in the cost accounting systems of the different companies and sometimes even in different parts of the same company or organization.