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.

Learn about the process of cost accounting, its objectives, and different types of costs, including direct and indirect costs, to make informed management decisions.