Element of cost accounting:
Cost accounting is the process of accounting for costs and analysis of expenditures into their various components. It establishes budgets, standard costs and actual costs of operations, processes, departments or products and the analysis of variances, profitability, and social use of funds.
There are there three major cost elements which are;
1- Material costs
2- Labour costs
3- Overhead cost.
Material costs-these are the costs of materials in the production processes. The cost could be direct or indirect. The direct material costs are directly attributable to the cost of material resources while the indirect cost cannot be directly traceable to the cost of material in the production processes. An example of a direct material cost is the cost of purchasing cement in building a house and while is the indirect cost of site hairmet
Labour costs. these are the costs of personnel in the production processes. The cost could be direct or indirect. The direct labour costs are directly attributable to the cost of labour utilization while the indirect cost cannot be directly traceable to the cost of labour in the production processes.
Overhead cost.-the overhead expenses could be variable or fixed costs depending on how they react to the activity level.
Fixed Costs. are costs that remain unchanged respective of the activity level.
Variable costs. are costs that change in line with the activity level.
Step Fixed Costs. are costs that remain unchanged for a given level of range or time and after such time or range is exceeded such costs will increase in an equal proportion or in an almost equal proportion.
Administration and Distribution costs. These are costs incurred by the admin and selling departments and they are basically indirect costs.
Responsibility centre
This is a distinct unit, department, division or branch whose activities are under the management of a specific individual. There are four types of responsibility centres which are:
i) Cost centre
ii) Profit centre
iii) Investment Centre
iv) Revenue centre
Cost Centre
This is a department, division, segment, person or equipment in respect of which cost may be ascertained related cost unit for control purposes. The manager of a cost centre has a responsibility to control costs by either keeping it within the budget or keeping it at a comparable level with similar.
A cost unit-it is an identifiable cost of an item that is attributable to a production line.
Profit Centre- This is a unit of the organization often called a division which is responsible for expenditures, revenues and profits.
Investment Centre
This is a profit centre for which the designated manager is responsible for profit in relation to the capital invested in the division. It can be assessed using return on capital employed (ROCE) or residual income.
Revenue
This is a responsibility centre that generates revenue or the managers’ focus is to increase sales while the responsibility for investments and cost control resides with another person or centre.
Strategic Cost Management
It is a technique of reducing the total without sacrificing the quality and also increasing the top-line revenue. It focuses on making business more competitive by reducing the cost of operation.
Some of the techniques that can be used in strategic management are;
1- Just in Time (JIT) Approach- is a comprehensive production and inventory management system in which the materials and parts are purchased or produced as needed and just in time to be used at each stage of the production process. We have JIT purchasing and production.
2- Flexible manufacturing system (FMS)- a computerized network of automated equipment that is capable of one or more groups of parts or variations of a product in a flexible manner. It uses robots and computer-controlled materials handling systems to link several stand-alone numerically controlled machines in switching from one production run to another.
3- Total quality control- the acceptable level of quality is zero defects.
4- Total quality management- a situation where all business functions are involved in a process of continuous quality improvement, which has been adopted by many companies. Total quality management has to do with ensuring that there is a spirit of defined culture in quality improvement and maintenance in every aspect of the organization whether in terms of function and units recognizing the key elements of customers, products and employees.
5- Advance manufacturing techniques (AMT)- revolutionising the way product is manufactured which involve the replacement of human effort with machines. The goal of AMT is to increase efficiency and effectiveness.
Break Even Analysis
The break-even point is the joint at which total cost and revenue equate each other, that is, TC=Revenue.
The break-even point is calculated as Fixed Cost÷Contribution per unit.
The margin of safety defines the level at which sales must not fall below. It is the current sales minus break-even sales.
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