types of cost accounting

types of cost accounting

Exploring the Different Types of Cost Accounting

1. Introduction to Cost Accounting

What is cost accounting, and how can it be beneficial to your business? Cost accounting is a type of accounting that targets creating a product, service, or project. Over the past few years, this type of accounting became significantly synonymous with the manufacturing industry because it introduces computing the costs of a product. All cost accounting systems use the same basic principles, but there are different types of cost accounting used by different types of businesses.

Your business can only become successful when you are aware of all the costs that apply to your business. This is vital in determining the prices of your products and the launching of new products. One of the first concepts that accounting students are taught in business courses is cost accounting.

2. Types of Cost Accounting

4. Process Costing A better illustration of the production business method is process accounting. Continuous programming follows a continuous operation or process in which even non-identical things are accounted for and written out. Food manufacture is an excellent illustration of how goods like pasta and cocoa may be involved. Keep in mind that regular overhead operation costs would be a regular plant operation.

3. Batch Costing Batch accounting, as indicated earlier, occurs when big suppliers aim to manufacture parts of small runs. Batch admin calculates the overall charge variably to ensure specific orders fulfill the requirements. The reasoning is to save unnecessary storage that won’t be manufactured again, according to the amount and quantity provided.

2. Contract Costing or Terminal Costing There is also the issue of term accounting, and that’s a little more difficult, involving the management of various contracts. This may sound similar to job accounting, but many of them have different contracts. By deciding who made what and where the surplus will be transferred, the company determines what to purchase from the agreement.

1. Job Costing This form of cost accounting is used to measure job-based expenditure, such as that incurred by an engineering and building business. These companies have a special contract to complete a project and usually have to calculate the true cost to make future contracts that can benefit them. Job accounting, as a result, calculates the overhead and direct costs in order to determine the exact cost of every customer payment. One of the significant issues with job costing is keeping perfect paperwork in order to discover everything that can influence a single item.

3. 1. Job Order Costing

Although job costing is more commonly found in a manufacturing environment, the service industry also uses this unique costing method. In law firms, accounting firms, and repair shops, the cost per customer is recorded and sequentially compared to the revenue earned from the jobs. For example, a CPA firm will charge a client $2,400 to prepare a corporation income tax return. The firm will record direct materials, direct labor, and direct overhead costs items, such as photocopies, meals, and rent, which are not included in overhead items. Upon completion of the tax return, the total cost will be charged to the customer requesting the service.

Examples of businesses that would use job costing include building contractors, architects, accountants, developers/entrepreneurs, actors, hospitals, and law firms.

Job order costing is used in situations where many different products, services, or jobs are produced each period. Some examples include custom-made suits, ships, and custom-designed jewelry. In a job order costing system, costs are traced and allocated to individual jobs and typically, the job consists of a large project.

4. 2. Process Costing

A good example of companies which use continuous process cost accounting includes companies like Olin Mathieson Chemical Company, Standard Oil, Zaleski Freidland and Sons, and Airco Inc. There are also some food companies relating to paper manufacturing, and these include the various beer companies (when producing a can of beer), General Baking, General Foods, and Sunshine Biscuits. The cost of these companies is provided to the Consumer Product Center as materials are used by marketing personnel in determining the price at which products are placed next to the goods on the grocery shelf.

The second form of cost accounting is referred to as process costing. There are two types of process cost accounting. One is known as operation costing. This approach is utilized to establish the cost of producing one unit of product or of providing one service. It is used primarily for mass production with few differing styles. The second type of process costing takes place where there is a continuous process which is very difficult to break into units. Examples would include the gasoline we use or the paper we write on, but this category includes numerous other products.

5. 3. Activity-Based Costing

Using the principles of ABC, the company can better understand the costs of making a product or providing a service, especially considering the current changes in food production, their organization, their resource consumption, and their response to new government, market, and society demands. However, carrying out an ABC process is complex because of the large volume of data that company managers need to deal with and the costs and time spent reaching the goals expected by the ABC system, not just for the innovation of managers on the costing method used.

Activity-based costing (ABC) is a methodology that emerged as a breakthrough in the 1980s to promote a thorough revision of the concept of cost in current costing practice, also known as cost accounting. The ABC aims to measure costs by activity or by products, capturing all levels of the organizational hierarchy from expenses to final products, services, and customers. ABC has proposed the identification of resources that are assigned directly to the organization’s activities, identifying the output of the activities and subsequently associating the products and their resources considering how the activities are supported. In ABC, each event can perform a set of activities, a set of activities can support several products, and several products can support an organization’s goals.

6. 4. Lean Accounting

Lean accounting can result in near real-time reporting of information as it follows lean techniques in the flow of products. Financial, operational, internal, and managerial accounting are merged into a single integrated system supporting lean operational needs. Financial statements are reconciled frequently, and differences are closely monitored and liquidated. These processes keep the accounting system from generating economic imbalances in the way that traditional accounting systems can. The systems should be designed with flexibility to be responsive to immediate changes. These accounting changes occur before, not after, changes in operational capabilities.

Lean accounting is the application of lean concepts to the accounting function and flows of an organization. It facilitates the move to lean operational principles with the goal of eliminating waste and enhancing value creation. Lean accounting is not for every organization. The majority of companies find more guidance in demonstrating compliance with requirements of the financial accounting standards than in focusing on streamlining their accounting functions. Companies involved in continuous improvement and embracing operational change benefit the most from lean accounting. They view accounting through a broader set of lenses than traditional cost, operational, and administrative accountants do.

7. Conclusion and Future Trends

The academic research that was carried out allowed us to better understand, from the point of view of management accounting, which types of costs exist and how these are used by companies for production. We would underline the preponderance of traditional accounting concerns with the concept of product cost over the less known concept of capacity costs, which is interestingly becoming one of the most important goals of companies. Through the presentation and discussions of different types of costs, this article emphasizes the benefits in adopting new cost models, such as the time-driven activity-based costing model. This proposal provides a broader view of the existence of different types of costs and can help academics, accountants, industrial engineers, practitioners, and researchers recognize the potential advent of new types of costs and their interaction. That can make the link between cost accounting and cost control as tight as possible, and it is neared to cost management and cost auditing requirements. Research pathways are also presented.

Within the framework of cost accounting concepts and tools presented in former sections, the cost definition, the cost object, and the costing process are all key elements for understanding that it is possible to produce both product costs and different types of costs. Various cost flows are also required, such as those of direct and indirect materials, direct and indirect labour, and manufacturing burden. This paper aims to carefully present several types of costs that help academics and practitioners to better understand how they affect company results. All the costs and types of costs are placed in a context of cost accounting, and how they affect cost accounting is analyzed. Advantages and drawbacks of the different types of costs presented in this paper are discussed. Guidance is also presented to help the integration of different types of costs within cost accounting and to assess their behavior.