What is Cost Accounting: Understanding the Concept & Components

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Cost accounting is the skill and science of recording, classifying, summarizing, and analyzing costs with the objective of cost control, cost calculations and projections, and cost reduction, thereby helping management make prudent business decisions.

Objectives of Cost Accounting

  • Cost control: The first role is to manage the cost within the management of the budgetary restrictions has set for a particular product or service. It is necessary because management designates limited resources for specific schemes or production methods.
  • Cost computation: It is the origin of all other cost accounting duties as we can manage the value of sales per unit for appropriate goods.
  • Cost reduction: Cost computation improves the company decrease costs on projects and processes. A decrease in expenses implies more profits since the margin will typically grow.

Direct Costs vs Indirect Costs 

Direct costs are directly associated with producing goods. That means direct costs can be now identified as being used in the production of goods. So, for example, we can talk about explicit material and direct labour utilized in producing goods. These costs we can recognize as direct costs.

Indirect costs are costs that can’t be distinguished easily. The cause of this kind of cost can’t be determined separately because these costs support multiple running activities. For instance, the renting business pays for running a production operation would be called indirect costs. Since we can’t identify how many portions of the rent are used to produce goods, how much is applied for preparing the raw material, and how much is utilized to install the simulation practices that can guide the workers.

Following these two types of costs is crucial since we would be working these costs to determine sales per unit for a demanding product.

Fixed Costs, Variable Costs, & Semi-variable Costs

  • Fixed costs: Theseare costs that don’t improve with the expansion or contraction of production units. That suggests these costs remain related within a broad span of the spectrum. Plus, the per-unit fixed cost fluctuations as the production rises or decreases. For example, rent is a fixed cost. Even if the production gains or drops, the business needs to pay the same rent month in and month out.
  • Variable cost: Itis the exact opposite of fixed price—variable cost changes per the increase or reduction of production units. But even if the total shifting cost changes, per unit value per unit, remain the same irrespective of changes in production units. For example, the price of raw materials is inconsistent. The total cost of raw material differences if the production increases or decreases. But the per-unit cost of raw material remains the same even if the production increases or decreases.

Semi-variable costs: 

In it, both components are present. Semi-variable costs are a combination of fixed costs and variable costs. For example, let’s say that you pay $1000 per month as a fixed salary to all your workers and the workers who produce more than 50 units of toys every month. They get an additional $5 for every other unit produced. These sorts of wages will be called semi-variable wages.

Services of Cost Accountant

While most cost accountants serve in government organizations or big companies, few works as counsellors with public accounting firms or independently. Private consultants will frequently be called upon to offer services for small or mid-sized businesses that cannot substantiate the full-time job of a cost accountant. Those who are engaged full-time will deliver a wide diversity of responsibilities:

  • Implementing data for firm budget developments
  • Utilizing software to allot indirect costs to internal methods
  • Comprehensive analysis on proper cost drivers
  • Evaluation of implied business enterprises

Conclusion

Cost accounting is an aspect of management accounting that restricts the exact cost of manufacturing a product or providing a service by looking at all expenses within the supply chain. It is done for budget preparation and profitability analysis. The information derived from this process is helpful to managers in determining which products, departments, or services are most profitable and which ones need improvement.