cost accounting courses

cost accounting courses

The Importance and Practical Applications of Cost Accounting in Modern Business

1. Introduction to Cost Accounting

In this paper, we shall trace the development of cost accounting through a historical review of its concepts and principles. The dual nature of the cost system will be analyzed in such a manner that it satisfies present as well as future demands, and recent proposals by certified public accountants as well as the Federal Trade Commission will be investigated. Finally, we will reveal the origin and operation of the proposed scheme.

A specific problem that has arisen from the rapid development of industry has been the exorbitant growth of overhead charges on total output. The limited availability of high-quality personnel combined with excessive delays in the production process seem to be responsible for a great part of the increase. The problem has become so serious that development of new techniques for cost accounting to provide management with information for its solution is of ever-increasing importance.

2. Key Concepts and Principles of Cost Accounting

Standard costs allow management to plan, guide, and control operations. A standard cost is a predetermined unit cost that is developed from a variety of sources and is used for planning, controlling, and decision-making purposes. The price that should be incurred for the unit of product is developed from the cost accounting records and the engineering department as well as representatives from the purchasing department. The quantity of materials that should be used per unit of product is developed from the engineering department. Another important concept of cost accounting is the behavior of costs. This cost behavior is important in the development of reliable cost estimates for different levels of business activity. Variable costs are costs that vary in direct proportion to changes in the level of activity or volume of output. In contrast, fixed costs remain unchanged in total despite changes in activity or volume. A mixed cost contains both variable and fixed elements. The mixed cost is not proportional throughout all levels of activity or output. For example, the property taxes that a utility firm pays have both basic monthly fees and a variable fee based on the amount of electricity and gas produced and distributed. These are some of the key complex concepts and principles of cost accounting that illustrate what cost accountants need to understand and apply for effective performance.

There are several key concepts and principles of cost accounting that are important to understand and apply for an accountant. One of the most important concepts of cost accounting is the distinction between direct costs and indirect costs. Direct costs are expenses that can be clearly and easily traced to, or easily incurred as a result of, a specific cost object, such as a product or department. Direct costs consist of both direct materials and direct labor. Indirect costs are expenses that cannot be traced to a specific cost object in an economically feasible manner, such as manufacturing overhead. Manufacturing overhead consists of all manufacturing costs except for direct materials and direct labor. The key issue is whether or not the cost is easily traced to the product. Another foundational principle of cost accounting is cost versus revenue and profit analysis. Focusing on revenue without considering the costs incurred to generate that revenue is not a sound business practice. The sales price should be higher than the unit product cost to obtain a profit.

3. Cost Accounting Methods and Techniques

– Value Analysis – Need identification, functional analysis, and component identification are the techniques used to accomplish the objective of value analysis – cost reduction. – Operations Research and Industrial Engineering: Linear Programming, Forest-Fire method, Hungarian method, Salesmen travelling problem method, assignment method, and break-even analysis are used for solving complex problems of cost accounting. – The PERT and CPM methods available in the operations research can be applied to cost studies and control. – The development and use of relevant costing models such as the cost-volume-profit relationship and time value of money models for present value, future value, and annual equivalent present value ensure cost compounding benefits are available. – All forecasts are necessarily based on existing evidence, and trended sensible forecasts are formed of existing data.

There are numerous methods and techniques in cost accounting capable of more than adequately providing the cost information to modern management without reliance on financial accounting data. Listed and described according to the different heads under which they generally fall, these methods and techniques include:

4. Cost Accounting in Decision Making

All these applications build upon management’s understanding of the behavior patterns of the various types of costs and other data which have been used for predictions. Although management structure and the cost pattern information being used in logico-mathematical models lags behind the sophistication of cost accounting information, models of technology selection and others are beginning to be extended for the use of accounting data. With the passage of time, it is not unrealistic to envisage decision support systems where cost accounting information derived from flexible accounting systems plays a much wider role in evaluation.

The use of cost accounting information can also have important effects on decision-making for the company. Is management considering adding or dropping a product line, or entering a new market area? In these and other decisions, management should consider the costs involved, as well as the benefits to be received. For example, if the estimation of cost is dependent upon the manner in which production costs react to changes in the volume of units produced, cost accounting data can be used for the purpose of finding the best-size unit. By instructing management as to the changes in production cost patterns to be expected with changes in operating environment, cost accounting can be used to evaluate the relative merits of different types of technology, processes, products, and changes in the product mix.

5. Advanced Topics in Cost Accounting

Some of these areas are offered to you in package format and you will note that some make direct use of the cost flow relationships we already present. Our objective is to provide additional coverage of topics and offer you an applied feel for cost accounting issues through applied examples so that you can appreciate richly what cost accounting can do for you.

e. Absolute and Relative Behavior and Balance Scorecards – When we assess the behavior of costs or budget planning, we are looking for insights into either total utilization or the efficiency of operations with respect to a given capability. Such insights can be detailed parts of a balance scorecard measurement grid, which is a popular tool for helping companies represent their strategies for investors.

d. Lower of Cost or Market – We are more interested in the cost portion of this concept, which is heavily identified with inventory.

c. Cost of Goods Sold

b. Statement of Cash Flows – If the numbers designed for the income statement and balance sheet provided to you have evolved from manufacturing applications, we can show you how we construct a statement of cash flows from that basis.

a. Preparation of Income Statement and Balance Sheet – This is the area of cost accounting that places it within the financial accounting domain. You can see examples of pro-forma income statements and balance sheets that have been affected by adjusting entries and reclassifications performed making use of the cost accounting information we have discussed elsewhere on our site.

In addition to the points of view we have explored, there are some additional topics in which you may be interested that make the field of cost accounting mature and distinctive. Some of these areas involve topics where cost accounting intertwines closely with financial accounting and are distinguished within the cost accounting domain by practical applications that touch on various areas in which managerial accounting is involved.