Cost Accounting Fundamentals

Cost Accounting

Definition:

Cost accounting is a process of collecting, classifying, and reporting cost data to determine the cost of producing goods or services.

Objectives:

• To determine the cost of production
• To identify areas for cost reduction
• To provide cost data for management decision-making
• To prepare financial statements

Types of Costs:

• Direct Costs: costs directly associated with production, e.g., labor, materials
• Indirect Costs: costs not directly associated with production, e.g., overheads, utilities
• Fixed Costs: costs that remain constant, e.g., salaries, rent
• Variable Costs: costs that vary with production, e.g., raw materials, labor hours

Cost Accounting Systems:

• Job Costing: costing system used for unique products or projects
• Process Costing: costing system used for mass-produced products
• Activity-Based Costing: costing system that assigns costs to activities and products

Budgeting

Definition:

Budgeting is the process of planning and controlling financial resources to achieve organizational goals.

Purposes of Budgeting:

• To provide a financial plan for the organization
• To allocate resources effectively
• To monitor and control expenses
• To evaluate performance

Types of Budgets:

• Operating Budget: budget for daily operations, e.g., salaries, utilities
• Capital Budget: budget for long-term investments, e.g., equipment, buildings
• Cash Budget: budget for cash inflows and outflows

Budgeting Techniques:

• Incremental Budgeting: budgeting based on previous year's budget
• Zero-Based Budgeting: budgeting from scratch, justifying every expense
• Activity-Based Budgeting: budgeting based on activities and cost drivers

Cost Accounting

Definition and Objectives

• Cost accounting is a process of collecting, classifying, and reporting cost data to determine the cost of producing goods or services.
• Its objectives are to determine the cost of production, identify areas for cost reduction, provide cost data for management decision-making, and prepare financial statements.

Types of Costs

• Direct Costs: costs directly associated with production, e.g., labor, materials.
• Indirect Costs: costs not directly associated with production, e.g., overheads, utilities.
• Fixed Costs: costs that remain constant, e.g., salaries, rent.
• Variable Costs: costs that vary with production, e.g., raw materials, labor hours.

Cost Accounting Systems

• Job Costing: a costing system used for unique products or projects.
• Process Costing: a costing system used for mass-produced products.
• Activity-Based Costing: a costing system that assigns costs to activities and products.

Budgeting

Definition and Purposes

• Budgeting is the process of planning and controlling financial resources to achieve organizational goals.
• Its purposes are to provide a financial plan for the organization, allocate resources effectively, monitor and control expenses, and evaluate performance.

Types of Budgets

• Operating Budget: a budget for daily operations, e.g., salaries, utilities.
• Capital Budget: a budget for long-term investments, e.g., equipment, buildings.
• Cash Budget: a budget for cash inflows and outflows.

Budgeting Techniques

• Incremental Budgeting: budgeting based on previous year's budget.
• Zero-Based Budgeting: budgeting from scratch, justifying every expense.
• Activity-Based Budgeting: budgeting based on activities and cost drivers.