is cost accounting hard

is cost accounting hard

Simplifying Cost Accounting: Strategies and Techniques for Success

1. Introduction to Cost Accounting

In simple terms, a cost is what you give up in the process of generating revenue. Companies must give up resources to provide goods or services to customers. The resources are given over to suppliers of labor, capital, raw materials, utilities, and other items. Growth and expansion of a company’s operations come as a result of management decisions to obtain product and service resources. Because decisions to obtain resources usually carry no assurances that the profits realized in the future will exceed the costs of obtaining resources, management decisions with respect to the acquisition of these resources determine the future success and viability of the company.

Welcome to the wonderful world of cost accounting. The purpose of this book, plain and simple, is to provide you with an easy-to-read explanation of the basic concepts behind cost accounting and demonstrate how these ideas can be applied to fit your needs. Often, people are challenged by cost accounting because it involves an entirely new set of terms and concepts. Before we get into the nuts and bolts of the cost accounting process, we thought we should provide a brief explanation of the three most fundamental of these concepts: costs, expenses, and losses. Then we will walk you through what is called the cost accumulation/assignment process.

2. Key Concepts and Principles in Cost Accounting

The distinction between a product and a service is first defined. Product and service costing are developed in the context of a three-tier structure called the value chain, the business functions that add value to a product or service. The main focus is on cost accumulation, allocation and assignment concepts and techniques, along with relevant terms and definitions. The section concludes with a discussion connecting cost accumulation, as traditionally derived in job and process cost systems, to activity-based costing. This system incorporates resource and activity cost measurement and is the foundation for throughput accounting.

Accounting for product and service costs is fundamental to the operation of a business. It is a subject that is usually studied with diminishing appreciation of its role and importance. But as a business game, with pressures and challenges, the reality is quite different. The pressures and demands can sometimes be overwhelming. This chapter sets the stage in that game by presenting a blend of the essential concepts in managerial accounting for product and service costing. The chapter develops the essentials at an introductory and conceptual level.

3. Common Challenges in Cost Accounting and How to Overcome Them

Another reason is economies of scale. Large companies have these benefits already while smaller companies do not. Adapting to allocate as many costs as possible is going to be significantly more beneficial to a company that is not already enjoying these benefits. Work in progress (WIP) calculations can be very cumbersome and exact for manufacturing companies that do not have good, automated systems. This can be extremely burdensome for companies with long cycle times. Industries with rapidly changed overhead costs, such as in consulting and marketing agencies, have similar challenges. Additionally, outside of actual production, companies are rarely honest with themselves that they have to know their firms to complete cost allocations. By understanding and working through the economic specifics, you can help a business provide just the right level of detail in their cost accounting system.

Full cost accounting (i.e. allocating all costs and providing management with a fully loaded average cost per unit) has a large number of benefits for a business, but that doesn’t mean it is going to be easy to get employees to do it. There are quite a few reasons that businesses fail to support making the major changes that adopting a full cost accounting system entails. The biggest challenge in trying to adopt full cost accounting is usually getting everyone – especially management – to appreciate the change. Employees have been doing things one way for a while now, and it is sometimes hard for people to see how just allocating more costs out to the jobs can be so powerful.

4. Practical Applications of Cost Accounting in Different Industries

Practical applications are included for industries such as precision tool manufacturing, custom commercial millwork, service manufacturing, quick response manufacturing, electronic component manufacturing, retailing, process manufacturing, construction, software, health care, not-for-profit organizations, depreciation time block accounts, and accounting organizations. These illustrations of specific cost accounting applications prepare the reader for the practical examples presented in subsequent chapters.

The strategies and practical applications of cost accounting are discussed in all areas of the book, but it is also helpful to include discussions of practical applications by industry. This is because different industries face different problems and issues when they implement or refine their cost accounting systems. Chapter 1 discusses the fact that, although there are specific differences in cost accounting by industry, there are also overarching strategies that can be profitably applied across industries. The principles of affordability, value of information, and practicality are examples of such strategies. This chapter expands by discussing some of the specific cost accounting systems used in selected industries. Many of the following industry examples are taken from the author’s classroom experiences.

5. Innovations and Trends in Cost Accounting

The current leaders in providing activity-based costing information are not the accountants but the management science-supporting accounting systems. These systems rely on information derived from advanced technologies—for example, computer-integrated manufacture or expert systems. They are the actual workers of the ABC process. Accountants, in contrast, use a simplified cost system (either an alternative costing system or the traditional old costing system) and use information from computer models only on the demand side of cost allocation. In this common system, accountants remain in control of the descriptors of the alternative costing system or of the system producing the costs which are used for decision-making, they are not in control of the cost information they use for management during the working real-time operation. Business units in companies, outside of the finance area, which rely on ABC could find that there is a substantial mismatch between the costing found in the corporate computer system and their own on-line management information systems. ABC requires many managerial and employee decisions including decisions about management, primary business practices, information content, work organization, and the scope of management field that relies on ABC. It seems that ABC is on the increase due to its link with JIT.

Activity-Based Costing

Innovations in cost accounting date back to the 1980s and can be seen as responses to criticisms of traditional cost accounting. Techniques such as activity-based costing (ABC) and other inroads toward accurate costing are generally accepted. Trend data reports a slow increase in use of these systems. This section briefly describes a few of the more important cost management accounting innovations users of traditional cost accounting may consider.