Cost Accounting and Costing Methods

Study Notes

A technique and process to calculate the cost of producing a product or service
Involves consistent recording and analysis of all costs associated with production
Aims to determine the cost of a product or service for better decision making, cost control, and pricing
Examples of costing methods include job costing, process costing, and activity-based costing, each suited for different types of production processes

A branch of accounting that focuses on classifying, recording, allocating, summarizing, and reporting costs
Provides cost information to managers for decision making, pricing strategies, cost control, and performance evaluation
Includes both direct and indirect cost elements
Focuses on internal management needs rather than external reporting
Provides data for budgeting and forecasting

The practice of applying principles, methods, and techniques of costing and cost accounting to control costs and determine profitability
Involves presenting information for managerial decision making
Blends art and science, requiring judgment and analysis

Ascertainment of Cost: Determining the cost of goods or services by classifying costs into direct (e.g., raw materials, direct labor) and indirect (e.g., overheads) costs.
Cost Control and Reduction: Identifying areas for cost control or reduction without sacrificing quality. This is important for profitability and competitiveness.
Determination of Selling Price: Setting a price that covers the cost and includes a desired profit margin. This involves understanding the cost structure and market conditions.
Managerial Decision Making: Providing data for decisions such as make-or-buy, pricing, outsourcing, and budgeting.
Performance Evaluation: Using cost data to assess the effectiveness and efficiency of production processes and management decisions.

Manufacturing: Helps determine the cost of producing each unit of a product by calculating direct material costs, direct labor costs, and overheads. Example: analyzing cost centers in automobile factories.
Service Industry: Determines the cost of delivering a service. Example: calculating consultant fees and office overheads in a consultancy firm.
Construction: Provides data for estimating total project cost including labor, materials, and overheads to set a competitive bid price.

Purpose and Users: Financial accounting reports on profit/loss and financial position to owners and external parties; cost accounting aims to support internal management decisions and activities.
Legal Requirements: Financial accounting must follow requirements set by the Companies Act and other regulatory bodies; cost accounting is more flexible to meet management's needs.
Nature of Data: Financial accounting utilizes actual facts and figures; cost accounting uses both actual data and estimates/assumptions.
Transaction Types: Financial accounting focuses on external transactions with non-employees; cost accounting tracks internal transactions and cost flows.