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    Cost Accounting

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    ALI PAUL TOOCHUKWU
    Cost accounting is the process of recording, classifying, analyzing, summarizing, and allocating costs associated with manufacturing or producing a product or providing a service. It helps management understand where costs come from and which costs can be controlled to improve efficiency and profitability. The key aspects of cost accounting are cost determination, cost allocation, standard costing, and variance analysis.

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    Cost Accounting

    Uploaded by

    ALI PAUL TOOCHUKWU
    3 views8 pages
    Cost accounting is the process of recording, classifying, analyzing, summarizing, and allocating costs associated with manufacturing or producing a product or providing a service. It helps management understand where costs come from and which costs can be controlled to improve efficiency and profitability. The key aspects of cost accounting are cost determination, cost allocation, standard costing, and variance analysis.

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    Cost accounting is the process of recording, classifying, analyzing, summarizing, and allocating costs associated with manufacturing or producing a product or providing a service. It helps management understand where costs come from and which costs can be controlled to improve efficiency and profitability. The key aspects of cost accounting are cost determination, cost allocation, standard costing, and variance analysis.

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    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    3 views8 pages

    Cost Accounting

    Uploaded by

    ALI PAUL TOOCHUKWU
    Cost accounting is the process of recording, classifying, analyzing, summarizing, and allocating costs associated with manufacturing or producing a product or providing a service. It helps management understand where costs come from and which costs can be controlled to improve efficiency and profitability. The key aspects of cost accounting are cost determination, cost allocation, standard costing, and variance analysis.

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    © All Rights Reserved
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    of 8

    Cost Accounting is a business practice in which we record, examine,

    summarize, and study the company’s cost spent on any process,


    service, product or anything else in the organization. This helps the
    organization in cost controlling and making strategic planning and
    decision on improving cost efficiency. Such financial statements and
    ledgers give the management visibility on their cost information.
    Management gets the idea where they have to control the cost and
    where they have to increase more, which helps in creating a vision and
    future plan. There are different types of cost accounting such as
    marginal costing, activity-based costing, standard cost accounting, lean
    accounting. In this article, we will discuss more objectives, advantages,
    costing and meaning of costs.

    Cost Accounting
    It is a process via which we determine the costs of goods and services. It
    involves the recording, classification, allocation of
    various expenditures, and creating financial statements. This data is
    generally used in financial accounting.

    This helps us calculate the costs of the various goods. It also involves a
    suitable presentation of this data for the purposes of cost control and
    guidance to the management.

    It deals with the cost of every unit, job, process, order, service, etc,
    whichever is applicable and includes the cost of production, cost of
    selling and cost of distribution.

    Features of Cost Accounting

     It is a sub-field in accounting. It is the process of accounting for costs


     Provides data to management for decision making and budgeting for
    the future
     It helps to establish certain standard costs and budgets.
     provides costing data that helps in fixing prices of goods and services
     Is also a great tool to figure out the efficiency of a unit or a process.
    It can disclose wastage of time and resources
    Types and Classification of Cost Accounting

     Activity Based Costing


     Lean Accounting
     Standard Accounting
     Marginal Costing
    Standard Accounting
    Standard costing is a technique where the firm compares the costs that
    were incurred for the production of the goods and the costs that should
    have been incurred for the same.

    Marginal Costing
    This type of costing is based on the principle of dividing all costs into
    fixed cost and variable cost.

    Fixed costs are unrelated to the levels of production. As the name


    suggests these costs remain the same irrespective of the production
    quantities.

    Variable costs change in relation to production levels. They are directly


    proportionate. The variable cost per unit, however, remains the same.
    Importance and Objectives of Cost Accounting

     Classification of Cost
     Cost Control
     Price Determination
     Fixing of Standards
    Advantages

     Measuring and Improving Efficiency


     Identification of Unprofitable Activities
     Fixing Prices
     Price Reduction
     Control over Stock
     Evaluates the Reasons for Losses
     Aids Future Planning

    Meaning of Cost
    How does one define with the cost of something? It is the amount to be
    paid for a good or service or the resources given in exchange for such
    good or service.

    In commercial terms, the cost is the monetary valuation of the effort,


    materials, risks and opportunity costs all put together.

    Cost is also defined as by the expenditure incurred to produce a given


    good or service. The cost will be the expenditure that is attributable to
    something.
    Value is measured in terms of the usefulness of the product, the cost is
    measured strictly in monetary terms.

    While cost is a very generic term, it can be classified further. All costs
    can be qualified as prime cost, sunk cost, factory cost, direct cost,
    indirect cost, etc. It is advisable to classify costs as it gives more
    information about it.

    Meaning of Costing
    Costing is essentially a technique via which we assign or costs to
    various elements of the business. It is a system of ascertaining costs.

    We follow certain rules and principles to guide us in this ascertaining of


    costs. Some such methods of costing to ascertain these costs are
    historical costing, standard costing, etc.

     Assigning variable costs according to the activity levels is direct


    costing
     And assigning fixed costs irrespective of activity levels is known as
    absorption costing

    What Is Double Entry?


    Double entry is a bookkeeping and accounting method, which states that
    every financial transaction has equal and opposite effects in at least two
    different accounts. It is used to satisfy the accounting equation:

    Assets=Liabilities+EquityAssets=Liabilities+Equity
    With a double-entry system, credits are offset by debits in a general
    ledger or T-account.

    Understanding Double Entry


    In accounting, a credit is an entry that increases a liability account or
    decreases an asset account. A debit is the opposite. It is an entry that
    increases an asset account or decreases a liability account. In the double-
    entry accounting system, transactions are recorded in terms
    of debits and credits. Since a debit in one account offsets a credit in another,
    the sum of all debits must equal the sum of all credits.

    The double-entry system of bookkeeping standardizes the accounting


    process and improves the accuracy of prepared financial statements,
    allowing for improved detection of errors. All types of business accounts are
    recorded as either a debit or a credit.

    Types of Business Accounts


    Bookkeeping and accounting are ways of measuring, recording, and
    communicating a firm's financial information. A business transaction is an
    economic event that is recorded for accounting/bookkeeping purposes. In
    general terms, it is a business interaction between economic entities, such as
    customers and businesses or vendors and businesses.

    Under the systematic process of accounting, these interactions are generally


    classified into accounts. There are seven different types of accounts that all
    business transactions can be classified:

     Assets
     Liabilities
     Equities
     Revenue
     Expenses
     Gains
     Losses

    Bookkeeping and accounting track changes in each account as a company


    continues operations.

    Debits and Credits


    Debits and credits are essential to the double-entry system. In accounting, a
    debit refers to an entry on the left side of an account ledger, and credit refers
    to an entry on the right side of an account ledger. To be in balance, the total
    of debits and credits for a transaction must be equal. Debits do not always
    equate to increases and credits do not always equate to decreases.
    A debit may increase one account while decreasing another. For example, a
    debit increases asset accounts but decreases liability and equity accounts,
    which supports the general accounting equation of Assets = Liabilities +
    Equity. On the income statement, debits increase the balances in expense
    and loss accounts, while credits decrease their balances. Debits decrease
    revenue account balances, while credits increase their balances.

    The Double-Entry Accounting System


    Double-entry bookkeeping was developed in the mercantile period of Europe
    to help rationalize commercial transactions and make trade more efficient. It
    also helped merchants and bankers understand their costs and profits. Some
    thinkers have argued that double-entry accounting was a key calculative
    technology responsible for the birth of capitalism.1

    The accounting equation forms the foundation of double-entry accounting and


    is a concise representation of a concept that expands into the complex,
    expanded, and multi-item display of the balance sheet. The balance sheet is
    based on the double-entry accounting system where the total assets of a
    company are equal to the total liabilities and shareholder equity.

    Essentially, the representation equates all uses of capital (assets) to all


    sources of capital (where debt capital leads to liabilities and equity capital
    leads to shareholders' equity). For a company to keep accurate accounts,
    every single business transaction will be represented in at least two of the
    accounts.

    For instance, if a business takes a loan from a financial entity like a bank, the
    borrowed money will raise the company's assets and the loan liability will also
    rise by an equivalent amount. If a business buys raw materials by paying
    cash, it will lead to an increase in the inventory (asset) while reducing cash
    capital (another asset). Because there are two or more accounts affected by
    every transaction carried out by a company, the accounting system is
    referred to as double-entry accounting.

    This practice ensures that the accounting equation always remains balanced;
    that is, the left side value of the equation will always match the right side
    value.

    Example of Double Entry


    A bakery purchases a fleet of refrigerated delivery trucks on credit; the total
    credit purchase was $250,000. The new set of trucks will be used in business
    operations and will not be sold for at least 10 years—their estimated useful
    life.

    To account for the credit purchase, entries must be made in their respective
    accounting ledgers. Because the business has accumulated more assets, a
    debit to the asset account for the cost of the purchase ($250,000) will be
    made. To account for the credit purchase, a credit entry of $250,000 will be
    made to notes payable. The debit entry increases the asset balance and the
    credit entry increases the notes payable liability balance by the same
    amount.

    Double entries can also occur within the same class. If the bakery's purchase
    was made with cash, a credit would be made to cash and a debit to asset,
    still resulting in a balance.

    Evolution and History of Cost Accounting


    Origin and History of Cost Accounting
    The age of the industrial revolution resulted in the first swept of large
    businesses and organizations. So these organizations were more
    complex and dynamic. This is what lead to the invention of what is now
    the modern cost accounting process in use.

    So the origin and evolution of cost accounting can be traced back to the
    industrial revolution. The idea was to help the businessmen to record
    and keep a track of their costs and expenses.

    Before the golden age of industrialization, most of the expenses of


    these businesses are what we would categorize as variable costs. The
    costs related to labour, materials, and other such variable costs.

    However, when industrialization took off, these businesses had more


    ‘fixed costs’. These are costs that are not directly related to the
    production of goods or services. Some examples of fixed costs are rent,
    depreciation, storage costs etc.

    As railroads, steel industry and other such large industries developed,


    understanding fixed costs became important. Allocating them became
    of importance to managers and owners for their decision making,
    pricing, and product development. And this was the origination of
    modern cost accounting.

    Evolution of Cost Accounting


    The environment of a business in the modern world is very complex
    and dynamic. A business has to navigate many complex factors such as
    competition, new entrants, risks, uncertainty etc.

    This makes the running and expansion of these companies that much
    more complex and difficult. This what not the case before
    industrialization when the businesses were small and in a relatively
    simpler environment.

    So for the successful management of a business in the current modern


    world, they require a lot of input and processes.

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