Cost accounting: This is used as an internal management tool which seeks to capture and analyse all incurred cost during the accounting period enabling management to make relevant decisions.
Direct material cost: These are the costs of raw materials which directly result into producing finished products. The materials must be easily identifiable with the resulting product.
Indirect material costs: These are cost of materials that are used in the production process but that are not directly traceable to the product e.g. electricity bills, and stationery costs.
Direct labour costs: These are wages, benefits, and insurance paid to employees who are directly involved in the manufacturing of goods or delivery of core services e.g. Investment Analyst.
Indirect labour cost are wages of those who are not directly involved in production of goods e.g. security personnel, drivers etc
Direct expenses: These are the expenses other than direct material and direct labour which are directly attributable to the manufacturing of products sold or services rendered. They are included in the cost of goods sold in a company’s income statement.
Indirect expenses: These are expenses that are are not immediately tied to and attributed to a company’s revenue-generating products or services. However, they are important to keep a firm afloat but not included while calculating the cost of goods sold e.g. Office and Administration expenses
Direct overhead costs: They are variable costs unique to specific production.
Indirect overhead costs: They are those not specific to any production but are paid on a regular basis.
There are four primary types of cost accounting namely, standard cost accounting, activity-based accounting, marginal cost accounting and lean accounting.
Standard Cost Accounting is used to identify, analyse, and investigate the variances between the actual cost incurred and cost that should have been incurred in the production of goods. It includes direct material cost, product cost, direct labour costs and manufacturing overheads incurred to deliver the goods.
Activity-based Cost Accounting: This identifies various activities in an organization for the purpose of allocating costs to these activities. These costs are further distributed to products and services based on actual consumption by every product.
Marginal Cost Accounting: This involves assigning only variable costs to the product while fixed costs (e.g., rent, electricity) are considered the costs for the period and included in the income statement as expenses. The cost assigned to products such as direct labour costs, direct material costs, varies proportionately with changes in the production volume. This approach provides the difference between total revenue and total variable costs.
Lean Accounting: This provides numerical feedback for manufacturers to help them implement lean inventory and lean manufacturing management practices. Unlike traditional accounting system which recognizes unutilized inventory as an asset, lean accounting considers only required inventory and defines efficiency based on how much time it takes to process an order.
Strategic cost management: This differs from traditional cost management, in that, it does not only aim to reduce costs but also improves the strategic position of a business. This process involves combining cost information with the structure of decision-making to reinforce the overall business strategy. Strategic cost management is not cost control but a method to use the cost information for efficient managerial decision-making. The importance of strategic cost management lies in its ability to constantly improve the quality of products offered to clients.
Cost Benefit Analysis: This is the process of reporting separate elements that results in a product or service (e.g., labour, equipment, materials) in a cost proposal as well as its proposed profit. The results of a cost analysis report will guide a company in efficiently utilizing available resources. The problem with cost-benefit analysis is when a company wants to consider qualitative or intangible factors because cost-benefit analysis generally represents quantitative items. In this instance, a cost analysis may require a skilful analyst to ascertain that quantitative metrics back up qualitative goals.
Break-even Point: This refers to the point at which total cost and total revenue are equal, meaning there is no loss or gain for your business. In other words, you’ve reached the level of production at which the costs of production equals the revenues for a product.
Break-even Analysis: Thisis an economic tool used to determine the cost structure of a company (the relation between the fixed cost, variable cost, and revenue) or the number of units that need to be sold to cover the cost.
Fixed costs: These include those costs that do not change with the level of output of production.E.g. include taxes, salaries, rents, depreciation cost, labour cost, interests, energy costs, etc.
Variable costs: These are costs that fluctuates either increase or decrease according to the volume of the production.