Cost Accounting Basics

Cost Accounting

Definition

• Cost accounting is a branch of accounting that deals with the calculation and management of costs incurred by a business.
• It involves the identification, classification, and allocation of costs to determine the cost of products, services, or projects.

Objectives

• To determine the cost of production or services
• To identify areas of cost reduction and improvement
• To provide cost information for decision-making
• To evaluate the performance of different departments or products

Types of Costs

• Fixed Costs: costs that remain unchanged despite changes in production or sales, e.g. rent, salaries
• Variable Costs: costs that vary with changes in production or sales, e.g. raw materials, labor
• Direct Costs: costs directly associated with the production of a product or service, e.g. labor, materials
• Indirect Costs: costs not directly associated with the production of a product or service, e.g. overheads, administrative costs

Cost Accounting Methods

• Job Costing: cost accounting method that tracks the cost of each job or project
• Process Costing: cost accounting method that tracks the cost of each process or stage of production
• Activity-Based Costing (ABC): cost accounting method that assigns costs to products or services based on the activities they require
• Standard Costing: cost accounting method that uses predetermined costs to estimate the cost of production

Cost Analysis

• Cost-Volume-Profit (CVP) Analysis: analysis of the relationship between cost, volume, and profit
• Break-Even Analysis: analysis of the point at which revenue equals total fixed and variable costs
• Marginal Analysis: analysis of the additional cost and revenue of producing one more unit

Cost Control

• Budgeting: process of establishing cost targets and limits
• Cost Reduction: strategies to reduce costs, e.g. process improvement, outsourcing
• Variance Analysis: analysis of the difference between actual and standard costs

Cost Accounting

Definition

• Deals with the calculation and management of costs incurred by a business
• Involves identification, classification, and allocation of costs to determine the cost of products, services, or projects

Objectives

• Determine the cost of production or services
• Identify areas of cost reduction and improvement
• Provide cost information for decision-making
• Evaluate the performance of different departments or products

Types of Costs

• Fixed Costs: remain unchanged despite changes in production or sales (e.g. rent, salaries)
• Variable Costs: vary with changes in production or sales (e.g. raw materials, labor)
• Direct Costs: directly associated with the production of a product or service (e.g. labor, materials)
• Indirect Costs: not directly associated with the production of a product or service (e.g. overheads, administrative costs)

Cost Accounting Methods

• Job Costing: tracks the cost of each job or project
• Process Costing: tracks the cost of each process or stage of production
• Activity-Based Costing (ABC): assigns costs to products or services based on the activities they require
• Standard Costing: uses predetermined costs to estimate the cost of production

Cost Analysis

• Cost-Volume-Profit (CVP) Analysis: analyzes the relationship between cost, volume, and profit
• Break-Even Analysis: analyzes the point at which revenue equals total fixed and variable costs
• Marginal Analysis: analyzes the additional cost and revenue of producing one more unit

Cost Control

• Budgeting: establishes cost targets and limits
• Cost Reduction: strategies to reduce costs (e.g. process improvement, outsourcing)
• Variance Analysis: analyzes the difference between actual and standard costs