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Information Researchers As Well As Totally Complimentary Business Intelligence Tools – Cost accounting is a form of management accounting of a company that aims to capture the total cost of production of a company by estimating variable costs and fixed costs such as lease cost at each stage of production.

Cost accounting is used by a company’s internal management team to identify all variable and fixed costs associated with the production process. It will first measure and record these costs separately and then compare input costs with output results to help measure financial performance and make future business decisions. There are several types of costs in cost accounting which are defined below.

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While cost accounting is often used by management within a company to aid in decision making, financial accounting is more commonly viewed by external investors or creditors. Financial accounting presents a company’s financial position and performance to external sources through financial statements, which include information about its revenues, expenses, assets, and liabilities. Budgeting is a tool for accounting management and is very useful in setting cost-control plans that can improve net margins for the company in the future.

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A key difference between cost accounting and financial accounting is that while in financial accounting cost is classified according to the type of transaction, cost accounting classifies costs according to the information needs of management. Cost accounting because it is used as an internal material. A management tool does not have to meet any specific standard, such as Generally Accepted Accounting Principles (GAAP), and as a result, varies in application from company to company or department to department.

Cost accounting methods are generally not useful in determining tax liabilities, which means that cost accounting cannot provide a complete analysis of a company’s actual costs.

Standard costing assigns “standard” costs rather than actual costs to its cost of goods sold (COGS) and inventory. Fixed costs are based on the efficient use of labor and materials to produce the good or service under standard operating conditions, and are essentially budgeted amounts. Even though fixed costs are assigned to products, the company still has to pay actual costs. Estimating the difference between standard (efficient) cost and actual cost is called variance analysis.

If variance analysis determines that actual costs are higher than expected, the variance is unfavorable. If it determines that actual costs are lower than expected, the variance is positive. Two factors can contribute to favorable or unfavorable variation. There is the cost of inputs such as the cost of labor and materials. It is considered as a ratio variable.

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Additionally, there is the efficiency or quantity of input used. It is considered as volume variation. For example, if Company XYZ had expected to produce 400 widgets in a period and ended up producing 500 widgets, the cost of goods sold would be higher due to the volume of total production.

Activity-based costing (ABC) identifies overhead costs from each department and allocates them to specific cost items such as goods or services. The ABC system of cost accounting is based on activities that represent any event, unit of work, or task with a specific objective, such as setting up machinery for production, designing products, distributing finished goods, or operating machinery. These activities are also considered cost drivers and are the activities used as a basis for allocating overhead costs.

Traditionally, overhead costs are allocated based on a common metric such as machine time. Under ABC, a functional analysis is performed where relevant activities are identified as cost drivers. As a result, ABC is more accurate and helpful when managers review the cost and profitability of their company’s specific services or products.

For example, cost accountants using ABC can send out a survey to production line employees to calculate the time they spend on different tasks. The costs of these specific activities are allocated only to the goods or services that used the activity. This gives management a better idea of ​​where exactly time and money are being spent.

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To illustrate this, suppose a company manufactures both trinkets and widgets. Trinkets are very labor intensive and require quite a bit of effort from the production staff. The production of widgets is automated and often involves putting the raw material into a machine and waiting for hours for the finished good. It doesn’t make sense to use machine time to allocate overhead to both objects because trinkets don’t use any machine time. Under ABC, trinkets are assigned additional overheads related to labor and widgets are assigned additional overheads related to machine usage.

The main goal of lean accounting is to improve financial management practices within an organization. Lean accounting is an extension of the philosophy of lean manufacturing and production, which aims to reduce waste while improving productivity. For example, if an accounting department can reduce wasted time, employees can save time and be more productive on value-added tasks.

When using lean accounting, traditional costing methods are replaced by value-based pricing and lean-focused performance metrics. Financial decision-making is based on the company’s total value stream impact on profitability. Value streams are a company’s profit centers, any branch or division that directly adds to its bottom line profits.

Marginal costing (sometimes called cost-volume-profit analysis) is the impact on the price of a product by adding one additional unit to production. It is useful for short-term economic decisions. Marginal costing helps management determine the impact of varying levels of costs and the level of operating profit. This type of analysis can be used by management to gain insight into profitable new products, selling prices for existing products, and the impact of marketing campaigns.

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The break-even point—the level of production at which total revenue per product equals total cost—is calculated by dividing a firm’s total fixed costs by its contribution margin. Contribution margin, calculated as sales revenue minus variable costs, is calculated on a per unit basis to determine the extent to which a particular product contributes to the firm’s overall profit.

Scholars believe that cost accounting was first developed during the Industrial Revolution, when the emerging economics of industrial supply and demand led manufacturers to track their fixed and variable costs in order to optimize their production processes.

Cost accounting allowed railroad and steel companies to control costs and become more efficient. By the beginning of the 20th century, cost accounting had become a broad topic in the literature on business management.

In contrast to general accounting or financial accounting, cost accounting is an internally focused, firm specific system. Cost accounting can be very flexible and specific, especially when it comes to the subdivision of costs and inventory valuation. Cost accounting methods and techniques vary from company to company and can become more complex.

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Cost accounting is helpful because it can identify where a company spends its money, how much it earns, and where it loses money. Cost accounting aims to report, analyze and improve internal cost controls and performance. Although companies cannot use cost-accounting statistics for their financial statements or tax purposes, they are important for internal controls.

These vary from industry to industry and company to company, although certain cost categories such as direct costs, indirect costs, variable costs, fixed costs and operating costs are usually included (some of which may overlap).

Since cost accounting systems are developed and tailored to a particular organization, they are highly customizable and adaptable. Managers appreciate cost accounting because it can be adapted, tinkered with and implemented according to the changing needs of the business. Unlike Financial Accounting Standards Board (FASB)-driven financial accounting, cost accounting is concerned only with externalities and internal objectives. Management can analyze information based on criteria it considers specific, such as how prices are set, resources are allocated, capital is raised, and risks are assumed.

Cost-accounting systems and the techniques used with them can have high initial costs to develop and implement. Training accounting staff and managers in esoteric and often complex systems takes time and effort, and mistakes can be made early on. Highly-skilled accountants and auditors are likely to charge more for their services when evaluating a cost-accounting system than a standardized one such as GAAP.

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Cost accounting is an informal set of flexible tools that a company’s managers can use to assess how well the business is operating. Cost accounting looks at evaluating the different costs of a business and how they affect operations, costs, performance and profits. Evaluating a company’s cost structure in isolation allows management to improve the way it conducts its business and thereby improve the company’s value. These are internal measurements and statistics only. Cost accounting cannot be used for a company’s audited financial statements issued to the public because they are not GAAP-compliant.

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