- Cost accounting is the cost incurred in a firm’s production or manufacturing unit. It is the role accounting information play in running a business enterprise, that is, cost of production, planning, controlling and decision-making (pricing, prices of goods and services).
Cost accounting aims to capture a company’s total cost of production by the variable of each step of production as well as the fixed expenses.
Types of cost
- Direct cost – expenses directly related to producing a specific cost object which may be a product, department or project. This will include labour and raw materials assuming that labour is specific to the product, department or project.
- Indirect cost – a cost that is not directly linked to the product. It includes costs involved with maintaining and running a company. These overhead costs are the ones left after the direct costs have been computed.
The materials and supplies needed for a company’s day-to-day operations include utilities, office equipment, rental, desktop computers and cell phones.
- Operating cost – costs associated with the day-to-day operations of a business. Operating costs can be fixed or variable.
- Fixed cost – costs that do not change based on the number of items produced, for example, mortgage or lease payment on buildings.
- Variable cost – cost tied to the company’s level of production. For a food company
Variable costs can change based on the number of food the company makes and fluctuating expenses on gas and electricity.
Raw materials such as rice, beans and oil will also increase if the company decides to produce more food.
- Semi-fixed cost – contains both variable and fixed elements of costs. The price remains fixed to some level of the activity or even if there is no activity. Still, it increases with the increase in the level of activity.
- Semi-variable cost – the fixed portion of a semi-variable cost is fixed up to a particular production volume. Therefore semi-variable costs are set for various activities and may change beyond that for different activity levels.
Strategic cost management
The process of reducing total cost while improving the strategic position of a business.
- Strategic cost management -is an approach focusing on making a business more competitive by reducing operating costs. It integrates cost information into the decision-making structure, reinforcing the organizational business strategy.
- Strategic position analysis is concerned with the impact on the strategy of the external environment, internal resources and competencies, and the expectations and influence of stakeholders.
It reflects or shows the company’s competitive position in the market.
- Value chain analysis identifies how all organizational activities related to the final product or value proposition are delivered to the customer or client.
- Cost drivers analysis – Identifies activities generating costs in the organization.
A cost driver is a factor that creates or drives the cost of the activity, the root cause of why a particular cost is incurred.
- Activity-Based Costing -a method of computing costs associated with each company’s product or line of products based on the number of resources consumed by each activity. It is important to note that activities consume resources while customers, products and channels of production consume activities.
The profitability of each customer can also be evaluated using cost drivers; in case of resource constraint, the less profitable orders can be eliminated.
Resources should be allocated to the most profitable activities or in proportion to profitability.
Cost drivers include machine hours, Number of setups, labour hours, and Number of orders packed and delivered.
- Standard costing – this is based on the efficient use of labour under normal operating conditions; essentially, they are budgeted.
- Variance – the difference between the standard cost and the actual cost. The variance is unfavourable if the actual cost is higher than expected. Conversely, if the actual cost is lower than expected, then the variance is favourable.
Factors that affect variance will include:
Cost of inputs – the cost of labour and materials ( Rate variance).
The efficiency or quantity of inputs used (Volume variance).
- Lean accounting – minimizing wastages and optimizing productivity includes value-based pricing and lean-focus performance assessment.
- Marginal costing – the cost of one additional unit of output. The concept is used to determine the optimum production quantity for a company. It is calculated by dividing the change in manufacturing cost by the difference in the quantity produced.
- Absorption cost – is a method for accumulating the costs associated with a production process and apportioning them to individual products. The accounting standards require creating an inventory valuation in an organization’s balance sheet.
- Contribution margin– shows the aggregate amount of revenue available after variable costs to cover fixed expenses and profit for the company.
Contribution margin = Revenue – Variable cost.
It can also be calculated per unit basis to determine to which extent a specific product contributes to the company’s profitability.
- Break Even point- the production level where total revenue equals the total cost.s
At this point, the profit is zero.
The Brake even point =Total fixed cost divided by the contribution margin