assignment on cost accounting

What is Cost Assignment?

Cost Assignment

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Cost assignment.

Cost assignment is the process of associating costs with cost objects, such as products, services, departments, or projects. It encompasses the identification, measurement, and allocation of both direct and indirect costs to ensure a comprehensive understanding of the resources consumed by various cost objects within an organization. Cost assignment is a crucial aspect of cost accounting and management accounting, as it helps organizations make informed decisions about pricing, resource allocation, budgeting, and performance evaluation.

There are two main components of cost assignment:

  • Direct cost assignment: Direct costs are those costs that can be specifically traced or identified with a particular cost object. Examples of direct costs include direct materials, such as raw materials used in manufacturing a product, and direct labor, such as the wages paid to workers directly involved in producing a product or providing a service. Direct cost assignment involves linking these costs directly to the relevant cost objects, typically through invoices, timesheets, or other documentation.
  • Indirect cost assignment (Cost allocation): Indirect costs, also known as overhead or shared costs, are those costs that cannot be directly traced to a specific cost object or are not economically feasible to trace directly. Examples of indirect costs include rent, utilities, depreciation, insurance, and administrative expenses. Since indirect costs cannot be assigned directly to cost objects, organizations use various cost allocation methods to distribute these costs in a systematic and rational manner. Some common cost allocation methods include direct allocation, step-down allocation, reciprocal allocation, and activity-based costing (ABC).

In summary, cost assignment is the process of associating both direct and indirect costs with cost objects, such as products, services, departments, or projects. It plays a critical role in cost accounting and management accounting by providing organizations with the necessary information to make informed decisions about pricing, resource allocation, budgeting, and performance evaluation.

Example of Cost Assignment

Let’s consider an example of cost assignment at a bakery called “BreadHeaven” that produces two types of bread: white bread and whole wheat bread.

BreadHeaven incurs various direct and indirect costs to produce the bread. Here’s how the company would assign these costs to the two types of bread:

  • Direct cost assignment:

Direct costs can be specifically traced to each type of bread. In this case, the direct costs include:

  • Direct materials: BreadHeaven purchases flour, yeast, salt, and other ingredients required to make the bread. The cost of these ingredients can be directly traced to each type of bread.
  • Direct labor: BreadHeaven employs bakers who are directly involved in making the bread. The wages paid to these bakers can be directly traced to each type of bread based on the time spent working on each bread type.

For example, if BreadHeaven spent $2,000 on direct materials and $1,500 on direct labor for white bread, and $3,000 on direct materials and $2,500 on direct labor for whole wheat bread, these costs would be directly assigned to each bread type.

  • Indirect cost assignment (Cost allocation):

Indirect costs, such as rent, utilities, equipment maintenance, and administrative expenses, cannot be directly traced to each type of bread. BreadHeaven uses a cost allocation method to assign these costs to the two types of bread.

Suppose the total indirect costs for the month are $6,000. BreadHeaven decides to use the number of loaves produced as the allocation base , as it believes that indirect costs are driven by the production volume. During the month, the bakery produces 3,000 loaves of white bread and 2,000 loaves of whole wheat bread, totaling 5,000 loaves.

The allocation rate per loaf is:

Allocation Rate = Total Indirect Costs / Total Loaves Allocation Rate = $6,000 / 5,000 loaves = $1.20 per loaf

BreadHeaven allocates the indirect costs to each type of bread using the allocation rate and the number of loaves produced:

  • White bread: 3,000 loaves × $1.20 per loaf = $3,600
  • Whole wheat bread: 2,000 loaves × $1.20 per loaf = $2,400

After completing the cost assignment, BreadHeaven can determine the total costs for each type of bread:

  • White bread: $2,000 (direct materials) + $1,500 (direct labor) + $3,600 (indirect costs) = $7,100
  • Whole wheat bread: $3,000 (direct materials) + $2,500 (direct labor) + $2,400 (indirect costs) = $7,900

By assigning both direct and indirect costs to each type of bread, BreadHeaven gains a better understanding of the full cost of producing each bread type, which can inform pricing decisions, resource allocation, and performance evaluation.

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Direct Costs

Indirect costs, fixed costs, variable costs, operating costs, opportunity costs, controllable costs, the bottom line.

  • Corporate Finance

What Are the Types of Costs in Cost Accounting?

assignment on cost accounting

Charlene Rhinehart is a CPA , CFE, chair of an Illinois CPA Society committee, and has a degree in accounting and finance from DePaul University.

assignment on cost accounting

Ariel Courage is an experienced editor, researcher, and former fact-checker. She has performed editing and fact-checking work for several leading finance publications, including The Motley Fool and Passport to Wall Street.

assignment on cost accounting

Cost accounting is an accounting process that measures all of the costs associated with production, including both fixed and variable costs. The purpose of cost accounting is to assist management in decision-making processes that optimize operations based on efficient cost management. The costs included in cost accounting are discussed in detail below.

Key Takeaways

  • Cost accounting is an accounting method that takes into consideration a company's total cost of production by evaluating both fixed and variable costs.
  • Managers use cost accounting to help make business decisions based on efficient cost management.
  • The types of costs evaluated in cost accounting include variable costs, fixed costs, direct costs, indirect costs, operating costs, opportunity costs, sunk costs, and controllable costs.
  • Cost accounting is not generally accepted accounting principles (GAAP) compliant and can only be used for internal decision-making.

Direct costs are related to producing a good or service. A direct cost includes raw materials, labor, and expense or distribution costs associated with producing a product. The cost can easily be traced to a product, department, or project.

For example, Ford Motor Company ( F ) manufactures cars and trucks. A plant worker spends eight hours building a car. The direct costs associated with the car are the wages paid to the worker and the cost of the parts used to build the car.

Indirect costs, on the other hand, are expenses unrelated to producing a good or service. An indirect cost cannot be easily traced to a product, department, activity, or project. For example, with Ford, the direct costs associated with each vehicle include tires and steel.

However, the electricity used to power the plant is considered an indirect cost because the electricity is used for all the products made in the plant. No one product can be traced back to the electric bill.

Fixed costs do   not vary with the number of goods or services a company produces over the short term. For example, suppose a company leases a machine for production for two years. The company has to pay $2,000 per month to cover the cost of the lease , no matter how many products that machine is used to make. The lease payment is considered a fixed cost as it remains unchanged.

Variable costs fluctuate as the level of production output changes, contrary to a fixed cost. This type of cost varies depending on the number of products a company produces. A variable cost increases as the production volume increases, and it falls as the production volume decreases. Businesses can also decide to forego an activity or production to avoid the associated expenses—called the avoidable costs .

For example, a toy manufacturer must package its toys before shipping products out to stores. This is considered a type of variable cost because, as the manufacturer produces more toys, its packaging costs increase, however, if the toy manufacturer's production level is decreasing, the variable cost associated with the packaging decreases.

Operating costs   are expenses associated with day-to-day business activities but are not traced back to one product. Operating costs can be variable or fixed. Examples of operating costs, which are more commonly called operating expenses , include rent and utilities for a manufacturing plant.

Operating costs are day-to-day expenses, but are classified separately from indirect costs – i.e., costs tied to actual production. Investors can calculate a company's operating expense ratio, which shows how efficient a company is in using its costs to generate sales.

Opportunity cost  is the benefits of an alternative given up when one decision is made over another. This cost is, therefore, most relevant for two mutually exclusive events. In investing, it's the difference in return between a chosen investment and one that is passed up. For companies, opportunity costs do not show up in the financial statements but are useful in planning by management. 

For example, a company decides to buy a new piece of manufacturing equipment rather than lease it. The opportunity cost would be the difference between the cost of the cash outlay for the equipment and the improved productivity versus how much money could have been saved in interest expense had the money been used to pay down debt.

Sunk costs are historical costs that have already been incurred and will not make any difference in the current decisions by management. Sunk costs are those costs that a company has committed to and are unavoidable or unrecoverable costs. Sunk costs are excluded from future business decisions.

Controllable costs are expenses managers have control over and have the power to increase or decrease. Controllable costs are considered when the decision of taking on the cost is made by one individual. Common examples of controllable costs are office supplies, advertising expenses, employee bonuses, and charitable donations. Controllable costs are categorized as short-term costs as they can be adjusted quickly.

What Are the Types of Cost Accounting?

The different types of cost accounting include standard costing, activity-based costing, lean accounting, and marginal costing. Standard costing uses standard costs rather than actual costs for cost of goods sold (COGS) and inventory. Activity-based costing takes overhead costs from different departments and pairs them with certain cost objects. Lean accounting replaces traditional costing methods with value-based pricing. Marginal costing evaluates the impact on cost by adding one additional unit into production.

What Is the Main Purpose of Cost Accounting?

The main purpose of cost accounting is to evaluate the costs of a business and based on the data, make better decisions, improve efficiency, determine the best selling price, reduce costs, and determine the profit of each activity involved in the operational process.

What Is the Difference Between Cost Accounting and Financial Accounting?

Cost accounting focuses on a business's costs and uses the data on costs to make better business decisions, with the goal of reducing costs and improving profitability at every stage of the operational process. Financial accounting is focused on reporting the financial results and financial condition of the entire business entity.

Cost accounting looks to assess the different costs of a business and how they impact operations, costs, efficiency, and profits. Individually assessing a company's cost structure allows management to improve the way it runs its business and therefore improve the value of the firm.

assignment on cost accounting

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  • Demystifying Cost Accounting vs. Financial Accounting: Your Guide to Success

Cost Accounting vs. Financial Accounting: Key Differences Every Student Should Know

Andrew Cronin

Understanding the distinctions between cost accounting and financial accounting is crucial for every student pursuing a career in accounting. In this comprehensive blog, we will delve into the key differences between these two branches of accounting, shedding light on their unique purposes, methodologies, and the specific roles they play in the business world. Whether you're grappling with your help with your cost accounting assignment or seeking clarity on financial accounting principles, this guide aims to provide you with the knowledge you need to excel.

Purpose and Scope

The purpose and scope of cost accounting and financial accounting diverge significantly. Cost accounting zooms in on internal operations, meticulously analyzing production costs and operational efficiencies to aid managerial decision-making. Its scope is narrow, emphasizing immediate concerns and day-to-day optimizations. Financial accounting, conversely, has a broader purpose—preparing financial statements for external parties. It encapsulates a company's overall financial health over a specific period, adhering to standardized reporting principles like GAAP or IFRS.

The scope of financial accounting extends to investors, creditors, and regulatory bodies, aiming for transparency and adherence to regulatory standards. While cost accounting is instrumental for internal managerial decisions, financial accounting serves external stakeholders, shaping the company's public image and influencing investment decisions on a larger scale. Understanding these divergent purposes and scopes is foundational for any student navigating the complex terrain of accounting studies.

Demystifying Cost Accounting vs. Financial Accounting

Time Horizon

In the realm of cost accounting, the time horizon is distinctly short-term, focusing on real-time analysis to optimize daily operations. Cost accounting operates as the internal compass for management decisions, addressing immediate concerns and aiding in the swift adjustment of operational strategies. This short-term perspective allows for a dynamic approach, ensuring adaptability to the ever-changing landscape of business operations.

Conversely, financial accounting adopts a long-term perspective, summarizing a company's financial position over specific reporting periods. Emphasizing historical data, financial accounting produces comprehensive financial statements at regular intervals, offering a panoramic view of a company's long-term financial health. This approach aligns with the external-facing nature of financial accounting, catering to the needs of investors, creditors, and regulatory bodies seeking a stable and transparent portrayal of a company's financial performance. The dichotomy in time horizons between cost and financial accounting reflects their distinct roles in the broader spectrum of organizational management and external stakeholder communication.

Reporting Standards

Cost accounting, with its focus on internal processes, operates with a degree of flexibility in reporting standards. This flexibility allows companies to design their cost accounting systems based on internal considerations and industry best practices. The absence of strict external standards offers adaptability, enabling businesses to tailor their reporting methods to suit specific operational needs. This customization is particularly beneficial for companies with unique cost structures or specialized production processes.

In contrast, financial accounting follows stringent external reporting standards such as GAAP or IFRS. These standardized principles ensure consistency and comparability across companies and industries. Financial accounting serves external stakeholders, including investors, creditors, and regulatory bodies, necessitating a common reporting framework. Adherence to established standards fosters transparency and trust, as stakeholders can confidently analyze financial statements, knowing they comply with universally accepted guidelines. While cost accounting embraces customization, financial accounting prioritizes a standardized approach, ensuring uniformity in financial reporting for external transparency and regulatory compliance. Understanding these differences is crucial for students navigating the intricacies of both cost and financial accounting disciplines.

Information Users

Cost accounting primarily serves internal stakeholders, catering to the informational needs of management, department heads, and employees. The detailed insights derived from cost accounting aid in making operational decisions, optimizing efficiency, and controlling costs in real-time. The focus is on enhancing internal processes and streamlining operations for improved overall performance.

Conversely, financial accounting is designed to meet the needs of external stakeholders. Investors, creditors, government agencies, and the general public rely on financial statements for a comprehensive overview of a company's financial health. Financial accounting provides a transparent representation of a company's performance over a specific period, influencing external decision-makers in areas such as investment, lending, and regulatory compliance. While cost accounting is tailored for internal management, financial accounting's broader audience necessitates a standardized approach to ensure consistent and reliable information for external stakeholders. Understanding these distinctions empowers students to navigate the varied informational requirements of both internal and external stakeholders in the accounting field.

Measurement Focus

Cost accounting employs detailed measurement methods to determine the actual costs associated with specific products, services, or activities. Techniques such as job costing, process costing, and activity-based costing are commonly used to allocate costs accurately. The emphasis is on providing granular insights into the costs incurred at different stages of production or within specific operational areas, aiding managers in making informed decisions for cost control and process optimization.

In contrast, financial accounting focuses on historical costs and follows a more generalized approach to measuring assets, liabilities, revenues, and expenses. The emphasis is on providing a snapshot of a company's financial position at a specific point in time. While cost accounting delves into specific cost components to guide internal decision-making, financial accounting takes a broader view to present a comprehensive picture of a company's financial health to external stakeholders. Understanding these measurement focus differences is essential for students aiming to master both cost and financial accounting methodologies.

Overlapping Areas: Management Accounting

An intermediary discipline, management accounting, acts as a bridge between cost accounting and financial accounting, amalgamating elements from both realms. While cost accounting drills down into internal operational costs for immediate decision-making, financial accounting focuses on external reporting standards. Management accounting, however, integrates these perspectives, offering a comprehensive view of a company's financial landscape to aid internal decision-makers.

Cost accounting techniques, such as job costing and activity-based costing, contribute to management accounting's toolkit, enabling detailed analyses of internal costs. Financial accounting principles, such as adherence to GAAP or IFRS, ensure that the information generated aligns with external reporting expectations. This integration emphasizes the interconnected nature of these accounting branches, underscoring their collective contribution to effective business management. Students grasping this convergence enhance their ability to navigate the multifaceted demands of accounting, strategically applying insights for both internal efficiency and external transparency.

Flexibility in Costing Methods

Cost accounting provides organizations with a high degree of flexibility in choosing costing methods that align with their unique operational characteristics. Whether employing job costing, process costing, or activity-based costing, companies can tailor their approach based on specific needs. This flexibility allows for a more detailed and nuanced analysis of costs related to production, distribution, and other operational activities, fostering a comprehensive understanding of the cost structure.

On the other hand, financial accounting, constrained by standardized reporting principles such as GAAP or IFRS, follows a more rigid structure. While these standards ensure consistency and comparability, they limit the adaptability of financial accounting methods to the unique needs of individual businesses. Financial accounting primarily focuses on historical costs, offering a broader perspective on a company's financial health rather than delving into the granular details of various cost components. Recognizing these differences underscores the specialized roles each accounting branch plays in providing information tailored for specific purposes within an organization.

Regulatory Compliance

Cost accounting operates with a notable degree of freedom as it is not subject to stringent regulatory requirements. Companies have the liberty to design their cost accounting systems based on internal considerations and industry-specific needs. This flexibility allows for innovation and customization, making cost accounting adaptable to the unique characteristics of each business.

In contrast, financial accounting adheres to strict regulatory standards such as GAAP or IFRS. Compliance with these standardized principles is essential for companies seeking transparency and credibility in the eyes of external stakeholders, including investors and regulatory bodies. Financial accounting's adherence to regulatory requirements ensures consistency and comparability across companies and industries. While cost accounting offers flexibility, financial accounting's regulatory compliance framework provides a structured and standardized approach, enhancing the reliability and trustworthiness of financial information for external audiences. Understanding these differences is crucial for students aiming to navigate the regulatory landscape in both cost and financial accounting disciplines.

Decision-Making Focus

Cost accounting is intricately linked to decision-making at various levels within an organization. Managers use cost data to assess the profitability of products, evaluate departmental performance, and make informed choices related to pricing, production, and resource allocation. The primary emphasis is on providing real-time, granular insights to guide day-to-day operational decisions. Cost accounting enables swift adjustments to optimize efficiency and maximize profitability, making it an indispensable tool for managerial decision-making.

In contrast, financial accounting, while informative for decision-makers, has a more retrospective focus. Its primary purpose is to provide a historical record of a company's financial activities, offering insights into its past performance rather than directly guiding real-time decisions. Financial accounting is geared towards external stakeholders, and its reports contribute to strategic decision-making by offering a comprehensive view of a company's financial health. While cost accounting drives operational decisions within the organization, financial accounting shapes the strategic decisions that impact the long-term goals of the company. Understanding these divergent decision-making focuses equips students with a nuanced perspective on the multifaceted role of accounting in organizational success.

Integration in Business Strategy

Cost accounting plays a pivotal role in the formulation and execution of business strategies at the internal level. By providing detailed insights into costs and operational efficiencies, cost accounting enables management to develop cost-effective strategies, pricing models, and resource optimization plans. It serves as a critical tool for aligning day-to-day operations with overarching business objectives, facilitating informed decision-making for sustainable growth.

In contrast, financial accounting contributes to strategic decision-making at the external level. Financial statements, generated through financial accounting, serve as a key component in shaping a company's public image and influencing external investment decisions. The transparent representation of a company's financial health, achieved through adherence to reporting standards like GAAP or IFRS, is fundamental for attracting investors, securing loans, and making strategic decisions.

Understanding these distinctions is essential for students as it allows them to appreciate the interconnected roles of cost accounting and financial accounting in guiding internal and external aspects of business strategy, respectively. This comprehensive perspective equips students to contribute effectively to the strategic success of an organization by leveraging the strengths of both accounting disciplines.

Cost Behavior:

One notable difference between cost accounting and financial accounting lies in how they handle cost behavior. Cost accounting delves deeply into understanding the behavior of costs within an organization, categorizing them as fixed, variable, or mixed. This granular analysis aids in decision-making related to production volume, pricing strategies, and overall cost control. Financial accounting, while recognizing these cost classifications to some extent, primarily focuses on presenting aggregated costs in financial statements. The detailed insights provided by cost accounting are crucial for internal management in optimizing operations and achieving cost efficiency.

Regulatory Compliance and External Auditing:

Another key difference pertains to regulatory compliance and external auditing. Financial accounting, being oriented toward external stakeholders, is subject to rigorous external auditing requirements. External auditors ensure that financial statements adhere to established accounting principles and provide a true and fair view of the company's financial position. Cost accounting, focused on internal decision-making, lacks the same level of external scrutiny. While it contributes vital information for internal control and decision-making, cost accounting systems are not subject to the same external audit requirements as financial accounting.

Conclusion:

In conclusion, the distinctions between cost accounting and financial accounting are vital for aspiring accountants to grasp. Whether you're trying to solve your cost accounting assignment or aiming to understand the broader financial landscape of a company, recognizing the unique purposes, time horizons, reporting standards, information users, and measurement focuses of these two branches is crucial. Cost accounting equips management with the tools to optimize operations, while financial accounting ensures transparency and accountability for external stakeholders.

As you tackle your cost accounting assignment, keep in mind the practical applications of cost accounting in day-to-day decision-making and the broader, long-term implications reflected in financial statements. Balancing these two perspectives is key to becoming a proficient accountant capable of guiding a company towards financial success.

So, the next time you find yourself immersed in accounting complexities, remember that a solid understanding of both cost accounting and financial accounting will empower you to navigate the intricate world of business finance with confidence.

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Demystifying cost accounting vs. financial accounting: your guide to success submit your assignment, attached files.

Cost accounting essentials: Concepts and career prospects 

Is number-crunching your favorite pastime? 

If yes, one of the suitable career options to explore is cost accounting.

As a vital aspect of financial management that focuses on measuring, analyzing, and controlling costs, cost accounting is an intriguing career pathway for those with a flair for numbers and precision.

In this article, we take a close look at the principles, advantages, and various methodologies associated with cost accounting. 

We also explore the key differences between cost accounting and financial accounting, and the skills you need to become a cost accountant.  

But first, let’s look at what cost accounting means.

Cost accounting cover

Table of Contents

What is cost accounting?

Cost accounting involves determining all the costs a company incurs when manufacturing a product (a smartphone, a car, or steel, etc.) or delivering a service (bookkeeping, social media management, etc.).

The primary aim of cost accounting is to help the management understand their costs and make informed decisions on controlling expenses and maximizing profit.

Cost accountants classify costs into different categories, such as:

  • Direct costs (the cost involved in manufacturing a product or delivering a service), and
  • Indirect costs or overhead costs (such as administration, taxes, and insurance that are not directly related to production).

Now, let’s look at what the practice of cost accounting involves.

According to the Statements of Federal Financial Accounting Standards (SFFAS) that describes the accounting standards and terms, cost accountancy is:

“Any disclosed or established accounting method or technique which is used for measurement of cost, assignment of cost to accounting periods, and assignment of cost to cost objects.“

But, what are cost objects and accounting periods?

Let’s go over these and other key terms used in this field:

  • Cost object — any product, item, activity, or department in an organization whose cost you measure. 
  • Cost centers — a specific location, department, function, activity, or individual in an organization that contributes to the costs.
  • Cost driver — a factor that influences the cost of a product or activity (for example, the number of raw materials you order, the quality of a product, etc.). 
  • Cost allocation — involves assigning a company’s total costs to specific cost centers or cost objects.
  • Accounting period — also called the financial period or reporting period, the accounting period is the time span for which a company prepares its financial statements.

Now, let’s look at what a cost accountant’s role is.

What is the role of a cost accountant?

The primary role of a cost accountant is to calculate, track, and manage the costs associated with a company’s products or services. Cost accountants play a crucial role in helping the management make informed financial decisions. 

Some key responsibilities of a cost accountant include:

  • Cost analysis — understanding the various costs a company incurs in manufacturing a product or delivering a service, including direct and indirect costs. 
  • Cost allocation — assigning costs to different cost centers, products, departments, or projects.
  • Budgeting and forecasting — helping the management prepare budgets and financial forecasts by providing data on costs and revenue.
  • Inventory management — monitoring inventory levels to help the management identify inventory control issues, such as low stock or overstocking.
  • Variance analysis — calculating the differences between actual costs and budgeted costs.  
  • Pricing decisions — providing support in determining product or service prices by considering the cost structure, market conditions, and competition.
  • Process improvement — identifying areas of inefficiency and recommending process improvements.
  • Financial reporting — preparing cost-related reports, cost sheets, and financial reports.
  • Compliance and regulation — ensuring compliance with accounting standards, industry regulations, and tax laws. 
  • Cost control — suggesting ways to control costs and helping implement cost control strategies to maximize profit.
  • Strategic decisions — assisting management in evaluating the financial viability of potential projects, investments, or business decisions.

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Elements of cost accounting

According to statistician and author of Cost accounting and costing methods , Harold J. Wheldon, the cost of manufacturing a product or delivering a service can be grouped under 4 different categories: materials, labor, direct expenses, and overheads.

These types of costs are also known as the ‘elements of cost accounting.’ 

Let’s see what each of them means:

  • Material — the expenses related to purchasing materials used in the production process. It includes the cost of raw materials, components, packaging, and any other materials that form part of the finished goods/services.
  • Labor — expenses related to employing workers directly involved in the production or service delivery. Labor includes wages, salaries, benefits, and other direct labor costs.
  • Other direct costs — these are directly linked to specific cost units but are not categorized as materials, labor, or overhead costs. Examples include subcontractor fees, equipment rental, transportation costs, and specialized services.
  • Overhead (indirect costs) — the indirect expenses that support production or service delivery but cannot be directly linked to production. These costs include rent, utilities, administration, depreciation, maintenance, etc.

When you add up the cost of direct materials, direct labor, and direct expenses that are involved in the production of goods, you get prime cost . When you add the prime cost and overhead/indirect costs, you get works cost or factory cost . In other words, works cost is the sum of all the elements of cost accounting.

Next, by adding the works cost to the cost of administration, selling, and distribution, you get the total cost of sales , which is the cost of manufacturing a product or delivering a service. 

Here is an image that makes it easy to understand these costs:

Elements of cost accounting

How cost accounting works

Cost accounting starts with the process of recording costs involved in producing goods or services. These costs include direct costs (e.g., raw materials, direct labor) and indirect costs (e.g., overhead expenses like rent, utilities, and depreciation). 

Let’s look at the steps of cost accounting to understand how it works.

Step #1: Classify costs and calculate direct costs

As described in the book titled Cost Accounting: Principles & Practice , the first step in cost accounting should be classifying labor, materials, and other expenses as direct and indirect costs. 

However, it’s important to note that materials, labor, and other expenses can be both direct and indirect.

Direct costs are the ones you would directly incur when producing goods or services.

Here are some examples of direct costs in each of the categories:

  • Direct materials — lumber, steel, fiber, or wood required for production (that become part of the finished goods/services),
  • Direct labor — carpenter, machine operator, designer, etc., involved in the production, and
  • Other direct expenses — rental of machinery/equipment, transportation of machines.

Indirect costs, while being important for operations, are not directly linked to production activities.

These are the examples of indirect costs in each of the categories:

  • Indirect materials — fuel for transport, stationary, consumables, office furniture (that are not part of the finished goods/services),
  • Indirect labor — management, office administration, security personnel, etc., and
  • Other indirect expenses — utilities, sales, marketing, depreciation, taxes, insurance, etc.

Step #2: Calculate the prime cost

The next step is to calculate the prime cost using this formula:

Prime cost = Direct labor + Direct materials + Direct expenses

Step #3: Calculate the works cost

This is the sum of prime cost and production overheads. The formula goes as follows:

Works cost = Prime cost + Production/factory overheads

Step #4: Calculate the production cost

Next, calculate the cost of sales by adding up works (factory) cost and administration overheads.

Cost of sales = Works cost + administration overheads

Step #5: Calculate the total cost of sales

Now, add up all the above costs to arrive at the total cost of sales:

Total cost of sales = Production cost + marketing/advertising and distribution costs

Examples of cost accounting

These examples will help you better understand how cost accounting works.

Cost accounting example #1

XXX company has recorded these expenses in producing 2,000 units of smartphones in the first quarter of 2023:

  • Raw material purchase — $12,000
  • Direct wages — $50,000
  • Other direct expenses — $10,000
  • Factory overhead — $10,000
  • Office rent and administration — $30,000
  • Distribution — $25,000
  • Advertising — $2,500
  • Market research — $1,000

The company has earned a sales revenue of $130,000 in the same period.

The cost accountant now prepares a cost sheet to reflect the expenses and the revenue.

By looking at the cost sheet, we see that the cost of production of 2,000 units of smartphones ($140,500) is more than the sales revenue ($130,000), resulting in a loss of $10,500.

Let’s look at another example to understand how cost accounting works.

Cost accounting example #2

A company earned a revenue of $89,000 in June 2023 from the sales of product X. The company has a record of the costs of the raw materials purchased, salaries paid, and other expenses:

  • Raw materials — $20,000
  • Direct wages — $25,000
  • Other direct expenses — $12,000
  • Factory overhead — $5,000
  • Administration — $11,000
  • Marketing — $800
  • Distribution — $15,000

Here’s what a cost sheet a cost accountant prepares to calculate the cost of production and the net profit would look like: 

The cost sheet shows that the company’s revenue ($89,000) is higher than the production costs ($88,800) allowing it to earn a profit of $200 in the month of June 2023. 

When the revenue a company earns by selling its product is more than the cost it incurs in making the product, it earns a profit. On the other hand, when the cost of manufacturing a product is more than the revenue, the company suffers a loss.

As you can see from these examples, cost accounting can be done on a monthly basis (example #2), quarterly basis (example #1), or for any other time period to understand the cost of production and plan the budget for upcoming projects.

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Cost accounting vs. financial accounting and management accounting: Key differences

Let’s see how cost accounting compares with other branches of accounting — financial accounting and management accounting.

Financial accounting vs cost accounting

Financial accounting deals with assessing the overall financial health of a business.

Financial accountants specialize in: 

  • Recording, 
  • Summarizing, and 
  • Reporting a business’s financial transactions through financial statements.

These financial statements (including income statements, balance sheets, and cash flow statements) offer a detailed view of a company’s financial performance and status over a specific period. 

The primary goal of financial accounting is to allow shareholders, investors, regulators, creditors, and the public to see how a company has performed in a specific time period. In contrast, cost accounting aims to determine and track the actual cost of production.

Financial accounting, unlike cost accounting, follows one of these accounting standards:

  • Generally Accepted Accounting Principles (GAAP) that are the accounting standards, principles, and procedures that are practiced in the US, or,
  • International Financial Reporting Standards (IFRS), which is a set of global accounting standards developed by the International Accounting Standards Board (IASB). 

While the objectives and processes may differ between cost accounting and financial accounting, both are essential for management accounting, the next topic of our discussion.

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Management accounting vs cost accounting

While cost accounting is concerned with tracking and comparing the cost of production, the primary goal of management accounting is to analyze and interpret the financial information (revenue, production costs, profit, loss, etc.) obtained through both financial and cost accounting. 

The management accounting relies on the financial reports from cost accounting and financial accounting to make informed decisions on the company’s economic growth.

This table gives you an overview of the differences between cost accounting, financial accounting, and management accounting.

Discover an efficient way of allocating and tracking resources with this informative post:

  • How to track resource allocation

What are the 4 types of cost accounting?

While businesses use many types of cost accounting methods to manage and analyze their costs efficiently, we are going to focus on 4 main types of cost accounting:

  • Standard costing,
  • Activity-based accounting,
  • Marginal costing, and
  • Lean accounting.

The choice of a method usually depends on the industry, the nature of the products or services, and the company’s resources, needs and goals.

Type #1: Standard costing

Standard costing is an approach to accounting that companies use to estimate expenses and revenue based on predetermined cost standards .

The cost standards are set for all aspects of operation or production, including the cost of materials, labor, overheads, and indirect costs.

Here’s an easy way to understand the concept of standard costing given by the authors of  Managerial Accounting: Creating Value in a Dynamic Business Environment ,  Ronald. W. Hilton and David E. Platt.

They compare standard costs to a ‘thermostat.’ Just as you can set ‘standard’ temperatures using a thermostat, you can set standards for the company’s expenses and monitor them with standard costing.

According to Alexander Berger, the author of Standard Costing, Variance Analysis, and Decision-Making , standard costing is most suited for manufacturing companies where production activities tend to be repetitive. However, Hilton and Platt write that many firms in the service industry also use standard costing. 

For instance, American Airlines sets standards for maintenance and fuel costs, while Allstate, an insurance company, sets standards for the time it takes to process an application.

Some commonly used methods to set cost standards include: 

  • Historical records of expenses, 
  • Engineering studies, and 
  • Consultation with cost accountants, suppliers, and other industry experts.

But, estimating the expenses and profit with standard costing is just one part of the story. The other part is about calculating the actual expenses and revenue (often different from the estimated numbers) at the end of the year.

This is where variance analysis comes into the picture. 

What is variance analysis?

Variance analysis is all about finding out how the actual costs vary when compared with the planned or budgeted costs.

Here is the simple formula to calculate variance:

Variance = Actual costs/revenue – Planned costs/revenue

Based on the answer you get after this calculation, the variance can be:

  • Favorable — the actual cost is lower than the planned cost (the result of the calculation is a positive number), or
  • Unfavorable — the actual cost incurred is higher than the planned cost (the calculation result is a negative number).

Type #2: Activity-based accounting (ABC)

According to accounting expert and author, Peter B.B. Turney, activity-based accounting method (ABC) is based on the premise that “products require activities and each activity consumes a certain number of resources.”

In simple words, this means that some activities (such as, operating a machine) are involved in making a product, and each of these activities involve costs.

In contrast to standard costing, which assigns pre-determined costs to materials and labor, ABC assigns costs to the actual resources used up in each activity.

For example, to manufacture a mobile phone, the company needs to purchase raw materials. In addition to the cost of raw materials, the cost accountant also calculates the time the purchasing manager spends acquiring the raw materials.

Type #3: Marginal costing

To put it simply, marginal costs are the additional costs a company incurs when manufacturing or selling one unit more than the current level of production.

A ‘unit’ in this context can mean any measure of goods, such as a dozen cars or a single smartphone.

For instance, let’s say a company manufactures 500 pairs of shoes per month and their total cost of production is $1,000.

However, the company decided to step up production and make 1,000 pairs of shoes next month and their production cost is now $2,000.

In this case, the marginal cost of production of an extra pair of shoes is:

Change in production cost between the old level of production to the new level (2,000-1,000) ÷ change in the number of units produced (1,000-500) = 1000÷500 = $2

The marginal cost of manufacturing an extra pair of shoes is $2.

Companies use marginal costing to see how to step up production to maximize profit. 

For instance, if the cost of manufacturing an additional unit is less than the revenue they earn by selling the unit, the company can make a profit.

Conversely, if the cost of manufacturing an additional unit is more than the revenue they can earn by selling it, they will suffer a loss. In this case, the company has to reduce production to remain profitable.

Type #4: Lean accounting

As another method of cost accounting, lean accounting is particularly suited for ‘lean organizations’ or companies that follow the ‘lean management’ practices.

The focus of lean management is to eliminate waste, make small, ongoing improvements in processes, and boost efficiency.

Instead of being a single ‘method’ of cost accounting, lean accounting involves a set of practices and principles designed to boost lean management.

One of the practices used in lean accounting is value stream costing , which visualizes and analyzes the entire value stream (all the processes and activities involved in production).

A technique used to visualize the processes is value stream mapping (VSM). This is a visual representation of all the components and processes required to manufacture a product or deliver a service.  

Once you create a visual stream map, you can identify all the activities and resources required for each value stream. The next step is to prepare an income statement (the detailed cost breakdown for each value stream).

Finally, you can identify and eliminate waste and boost efficiency.

While these are some of the commonly used methods of cost accounting, there are also other forms of cost accounting, such as process accounting and project accounting .

What are the advantages of cost accounting?

By providing vital data on actual costs, cost accounting supports financial planning, cost control, pricing decisions, and much more.

Advantage #1: Cost accounting helps companies find the exact cost of product or service 

To understand the importance of cost accounting, we contacted Michelle Delker , an experienced CPA and founder of The William Stanley CFO Group, a financial services firm. She explains that cost accounting has multiple benefits, such as helping companies find the exact cost of product or service:

Michelle Delker, Financial expert

“One of the main advantages of cost accounting is the ability to calculate the exact cost of a product or service, empowering companies to determine profitable selling prices. It also aids in understanding cost behavior, assisting businesses in making logical budgeting decisions, and identifying wasteful processes.”

Thus, cost accounting provides vital information about the cost of production — including a breakup of materials, plant capacity, labor, and costs.  

This allows companies to: 

  • Calculate and forecast their expenses accurately, 
  • Allocate resources efficiently, and 
  • Set realistic financial goals. 

By understanding the costs involved in different aspects of the business, managers can make informed decisions about resource allocation and budgeting.

Advantage #2: Cost accounting helps with identifying wasteful activities

One of the primary purposes of cost accounting is to identify profitable and unprofitable activities. 

A case in point is the 2022 study titled Advantages of the Cost Accounting View for Entrepreneurs in Improving Productivity and Financial Stability .

In this study, 90.20% of the surveyed managers agreed that cost accounting helps them identify unprofitable activities. This, in turn, leads to improved financial risk management.

By analyzing costs and performance data, cost accountants can pinpoint areas where wastage, inefficiencies, or losses occur, such as idle time/idle capacity, sub-optimal utilization of resources, and wastage of materials.

Advantage #3: Cost accounting helps determine product pricing

According to a survey titled Cost Accounting System and Its Impact on Service Pricing in Vodafone, 77% of the participants agreed that cost accounting plays a key role in determining service pricing.

How does cost accounting help set product/service pricing?

As you know by now, cost accounting involves calculating the total cost of manufacturing a product or service by calculating the cost of direct materials, labor, and overheads. 

Once you know the total cost, you can add a profit (or markup) to set the price of your product or service. For example, let’s say a company uses cost accounting to calculate the total cost of manufacturing one smartphone as $500. The company can now add a markup of $200 to set the price of the smartphone as $700. 

The right pricing strategy is particularly important in competitive markets, where pricing decisions can impact a company’s profitability. 

For instance, if you price your product too low, there is a risk of consumers perceiving the product to be inferior to your competitors’ products. If you price it too high, your consumers may opt to buy from your competitors who offer a lower selling price. In both cases, your company’s sales and profit can take a hit.

By calculating the actual cost of manufacturing a product or delivering a service (that involves materials, labor, overheads, and other direct expenses), cost accounting helps companies find the right selling price to ensure profit.

Advantage #4: Cost accounting helps with tracking inventory on an ongoing basis

The process of cost accounting involves continuously updating inventory levels. This helps management get real-time information about the quantity and value of the stock on hand. 

Thanks to these insights, companies can: 

  • Better manage inventory, 
  • Prevent stock outs or overstocking, and 
  • Make timely purchasing decisions.  

The findings of the above-cited study on advantages of cost accounting confirms this benefit of cost accounting.

In this study, 85% of the surveyed financial managers said cost accounting helps reduce the cost of inventory by enabling stock control.

Advantage #5: Cost accounting tracks cost behavior enabling cost comparison

By tracking costs on an ongoing basis, cost accountants can compare:

  • The cost of each product a company manufactures,
  • The cost incurred in different time periods, and
  • The costs incurred by each department in a company. 

How does it help you make these comparisons?

Let’s say a company makes two products: X and Y. Using cost accounting, the company calculates the total cost of manufacturing X as well as Y. By comparing the costs, the company can understand which product is more profitable and which one needs pricing adjustments or cost control.

Similarly, if an organization has several departments (production, engineering, sales, design, etc.), cost accounting helps calculate the overheads incurred by each department. Management can then identify the departments that have higher overhead costs and look at ways to reduce these costs.

Finally, by recording cost data for each year (or month), cost accountants can compare what the cost of production has been for the selected period. 

These comparisons offer valuable insights into cost trends, cost efficiencies, and the organization’s overall financial performance. Cost accounting methods, such as marginal costing, also helps understand cost behavior which refers to how costs change in response to changes in production volumes.

Managers can then use this information to benchmark against competitors and make data-driven decisions about resource allocation and process optimization.

Advantage #6: Cost accounting helps with identifying areas with higher profit potential

Unlike financial accounting, which is typically carried out annually, cost accounting is carried out on an as-needed basis to help the management understand and compare the cost of production.

Frequent analysis offers insights into the profitability of different products, services, or projects. As a result, companies can rely on cost accounting to understand which products or services are more profitable and which ones need tweaking in terms of pricing or production efficiency.

Advantage #7: Cost accounting assists in informed budget and investment decisions

Whether it is determining the optimal output levels, deciding whether to make or buy certain components, replacing old equipment, or introducing new products — cost accounting helps the management evaluate the financial impact of each decision. 

This reduces the risk of making hasty decisions and allows management to align their choices with the organization’s long-term goals.

Advantage #8: Cost accounting supports performance evaluation

Cost accounting involves comparing actual costs against standard costs. Management can set performance targets based on the results of this comparison to motivate their staff. Apart from providing a clear direction on what the staff should work towards, the standards used in cost accounting also help design incentives based on performance evaluation.

Ready to boost workplace performance? Read our post to unlock the secrets of performance improvement plans.

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What are the disadvantages of cost accounting?

Cost accountancy has been developed through a process of trial and error, which means instead of being an exact science, it is an acquired skill based on practice. 

Here are the disadvantages of cost accounting to keep in mind.

Disadvantage #1: Cost accounting is not a standardized system of accounting

Unlike financial accounting, cost accounting is not compliant with GAAP or IFRS and does not use a standard format or procedure to prepare the cost information.

As each company uses its own format for cost accounting, it can be difficult to compare cost data of different companies or different departments. Besides, as there is no uniform method followed, there is a possibility of two different cost accountants obtaining different results with the same information. 

In addition, there is no uniform way of determining the standard costs that cost accounting methods, such as standard costing, rely on. When cost standards are inaccurate, the final cost data and analysis can also be inaccurate.

Disadvantage #2: Cost accounting does not give a holistic picture of costs

Financial experts, such as Michelle Delkercost, warn that cost accounting may not give a complete view of the company’s financial situation in addition to being a resource-heavy accounting method:

“One of the disadvantages is that cost accounting may not always provide a holistic view of the company’s financial condition as it primarily focuses on individual costs rather than the entity’s overall financial performance. Additionally, it can be time-consuming and require significant resources, like experienced accountants and advanced accounting systems.”

Some methods of cost accounting, such as standard accounting and marginal costing, assume variable costs (costs that change when the production volume changes, such as raw materials or labor) to be constant. 

In addition, these methods of cost accounting also ignore fixed costs (costs that remain constant regardless of changes in production volume, such as monthly office rent or insurance premiums).

As no cost is exact or constant at any given time, these assumptions can lead to suboptimal decisions on budget planning, pricing, etc. 

Traditional methods of cost accounting are based on ‘standard’ costs and historical data. As said above, costs do not remain constant and using past/historical data to calculate the current cost of production can increase the chances of the results of cost accounting being inaccurate.

Disadvantage #3: Cost accounting can be resource-heavy

Yet another limitation of cost accounting is that it can be expensive to implement, particularly for smaller businesses. Companies need to invest in hiring experienced cost accountants and advanced tools to record, track, and report costs. The additional expenditure may reduce the profit the company earns.

FAQs about cost accounting 

Have more questions about cost accounting as a career option? In this section, you can find the answers to those questions.

How can I learn cost accounting easily?

While there is no short-cut to learning cost accounting, you can become a successful cost accountant by following these steps:

  • Obtain a bachelor’s degree — if you want to learn more about cost accounting, try pursuing a bachelor’s degree in accounting, finance, or a related field, such as business. Some universities offer specialized programs in cost accounting or management accounting.
  • Gain practical experience — seek internships or entry-level positions in accounting or finance departments to gain practical experience and exposure to cost accounting principles.
  • Pursue master’s degree (optional) — consider pursuing a master’s degree in accounting or a related field to enhance your knowledge and career prospects.
  • Acquire professional certifications — certifications, such as Certified Management Accountant (CMA) offered by the Institute of Management Accountants (IMA) can help you showcase specialized expertise. If you want to work in businesses that are publicly traded, you will need to obtain a Certified Public Accountant (CPA) certification by passing the CPA exam conducted by the American Institute of Certified Public Accountants (AICPA). 
  • Attend workshops and take up additional courses — deepen your understanding of cost accounting principles through self-study, workshops, or professional development courses.
  • Join professional associations — by joining relevant professional associations in the accounting field, you can network, access resources, and stay updated with industry trends.
  • Gain experience — seek opportunities to work in cost accounting roles within organizations where you can apply your knowledge and skills in real-world scenarios.
  • Stay updated with the latest developments — subscribe to journals and research materials to stay updated on any changes in accounting regulations and cost accounting practices. You may also need to take continuing education courses to maintain your license.

Are cost accountants in demand?

Yes! There are a number of sources that confirm that cost accountants are in demand and will continue to be sought after over the next decade.

For instance, the Bureau of Labor Statistics (BLS) projects an employment growth rate of 6% for accountants and auditors. Considering that the average growth percentage is 5% for all occupations, you can see that accountants have no reason to worry about finding open positions.

Between 2021 and 2031, 81,800 new positions are set to be available in this field, according to BLS data.

That’s not all. According to the list of the Best Business Jobs for 2023 accounting gets a ranking of #14, making it one of the best business jobs.

Yet another proof comes from Robert Half’s survey . This survey shows that cost accountants are the most sought-after experts among all finance and accounting professionals.

What skills are needed for cost accounting?

Cost accountants need to be able to manage and analyze financial data.

But, given the fast-paced changes in the business world, what are the other skills cost accountants need to be future-ready? 

Here are some essential skills needed for cost accounting:

  • Math and analytical skills: Cost accountants must also have strong analytical abilities to understand complex financial data, follow cost trends, and make informed decisions.
  • Attention to detail: As even small errors can have significant implications, attention to detail is vital to ensure accuracy in cost calculations and reporting.
  • Digital skills and data analysis: According to AICPA and CIMA (The Chartered Institute of Management Accountants) , cost accountants can gain a competitive advantage by keeping pace with new technological trends, such as data analytics and cybersecurity.
  • Communication: Cost accountants should be able to effectively communicate complex financial information to managers, investors, and other decision-makers.
  • Ethical conduct: Ethical behavior is critical for cost accountants to maintain the integrity of financial information and ensure compliance with accounting standards and regulations.
  • Familiarity with blockchain/cryptocurrency: Accountants need to know how to account for and report digital assets in financial statements. A survey conducted by Blockdata shows that 81 out of the world’s top 100 public companies actively carry out transactions involving blockchain. 
  • Accounting tools: Proficiency in accounting software is important for error-free and efficient cost data management. The right tools can help cost accountants get a unified view of costs and revenue data across all operations and departments.  

Streamline your accounting processes with the perfect tool. Check out our blog post to pick the best one for your needs:

  • 15 best free accounting software tools

Why is time management important for cost accounting? 

Cost accountants often work on multiple projects, clients, or tasks. As a result, these professionals need to cultivate time management skills to be able to:

  • Prioritize projects, clients, and/or tasks,
  • Track costs of materials, labor, and other direct and indirect expenses, 
  • Ensure accurate client billing, and
  • Meet the monthly or yearly deadlines for reporting.

This is where time tracking and billing software , such as Clockify, can help. With this free tool, you can prioritize tasks by adding multiple projects and tasks, set time estimates, and filter them to know which ones to prioritize.

You can also create and track costs related to different cost components like materials, labor, and other direct and indirect costs.

Clockify also allows you to set hourly rates for employees, projects, or tasks and calculate billable hours accurately.

Task rates

In addition, cost accountants can share reports with clients and give them access to data in real-time using Clockify.

Summary report

Final thoughts: Mastering cost accounting is easy with the right knowledge and tools

Cost accounting, as you have probably already realized by now, is an indispensable part of any company’s financial management.

In this guide, we have explored the basic concepts of cost accounting with real-life examples. We have also looked at the difference between financial accounting and cost accounting while touching upon the skills you need to become a cost accountant.

Beyond technical competencies, aspiring cost accountants should know how to use the right accounting software and sharpen their skills related to communication, data analysis, and time management.

Armed with the right skills and knowledge, you can make a meaningful impact within the organization and the broader financial landscape.

Sources for the table:

  • Cost Accounting: Principles & Practice
  • Cost Accounting: A Decision-oriented Approach

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Module 5: Job Order Costing

Introduction to accumulating and assigning costs, what you will learn to do: assign costs to jobs.

Financial and managerial accountants record costs of production in an account called Work in Process. The total of these direct materials, direct labor, and factory overhead costs equal the cost of producing the item.

In order to understand the accounting process, here is a quick review of how financial accountants record transactions:

Let’s take as simple an example as possible. Jackie Ma has decided to make high-end custom skateboards. She starts her business on July 1 by filing the proper forms with the state and then opening a checking account in the name of her new business, MaBoards. She transfers $150,000 from her retirement account into the business account and records it in a journal as follows:

For purposes of this ongoing example, we’ll ignore pennies and dollar signs, and we’ll also ignore selling, general, and administrative costs.

After Jackie writes the journal entry, she posts it to a ledger that currently has only two accounts: Checking Account, and Owner’s Capital.

A journal entry dated July 01 shows a debit of $150,000 to Checking Account and a credit of $150,000 to Owner’s Capital with the note “Owner’s investment - initial deposit to business bank account”. Each line item in the journal entry points to the corresponding debit or credit on its respective t-account.

Debits are entries on the left side of the account, and credits are entries on the right side.

Here is a quick review of debits and credits:

You can view the transcript for “Colin Dodds – Debit Credit Theory (Accounting Rap Song)” here (opens in new window) .

Also, this system of debits and credits is based on the following accounting equation:

Assets = Liabilities + Equity.

  • Assets are resources that the company owns
  • Liabilities are debts
  • Equity is the amount of assets left over after all debts are paid

Let’s look at one more initial transaction before we dive into recording and accumulating direct costs such as materials and labor.

Jackie finds the perfect building for her new business; an old woodworking shop that has most of the equipment she will need. She writes a check from her new business account in the amount of $2,500 for July rent. Because she took managerial accounting in college, she determines this to be an indirect product expense, so she records it as Factory Overhead following a three-step process:

  • Analyze transaction

Because her entire facility is devoted to production, she determines that the rent expense is factory overhead.

2. Journalize transaction using debits and credits

If she is using QuickBooks ® or other accounting software, when she enters the transaction into the system, the software will create the journal entry. In any case, whether she does it by hand or computer, the entry will look much like this:

3. Post to the ledger

Again, her computer software will post the journal entry to the ledger, but we will follow this example using a visual system accountants call T-accounts. The T-account is an abbreviated ledger. Click here to view a more detailed example of a ledger .

Jackie posts her journal entry to the ledger (T-accounts here).

A journal entry dated July 03 shows a debit of $2,500 to Factory Overhead and a credit of $2,500 to Checking Account with the note “Rent on manufacturing facility”. Each line item in the journal entry points to the corresponding debit or credit on its respective t-account.

She now has three accounts: Checking Account, Owner’s Capital, and Factory Overhead, and the company ledger looks like this:

A t-account for Checking Account shows a debit of $150,000 beginning balance, a credit of $2,500 dated July 03, and $147,500 ending debit balance. A t-account for Owner's Capital shows a credit of $150,000 beginning and ending balance. A t-account for Factory Overhead shows a debit of $2,500 dated July 03 beginning balance and a debit of $2,500 ending balance.

In a retail business, rent, salaries, insurance, and other operating costs are categorized into accounts classified as expenses. In a manufacturing business, some costs are classified as product costs while others are classified as period costs (selling, general, and administrative).

We’ll treat factory overhead as an expense for now, which is ultimately a sub-category of Owner’s Equity, so our accounting equation now looks like this:

Assets = Liabilities + Owner’s Equity

147,500 = 150,000 – 2,500

Notice that debits offset credits and vice versa. The balance in the checking account is the original deposit of $150,000, less the check written for $2,500. Once the check clears, if Jackie checks her account online, she’ll see that her ledger balance and the balance the bank reports will be the same.

Here is a summary of the rules of debits and credits:

Assets = increased by a debit, decreased by a credit

Liabilities = increased by a credit, decreased by a debit

Owner’s Equity = increased by a credit, decreased by a debit

Revenues increase owner’s equity, therefore an individual revenue account is increased by a credit, decreased by a debit

Expenses decrease owner’s equity, therefore an individual expense account is increased by a debit, decreased by a credit

Here’s Colin Dodds’s Accounting Rap Song again to help you remember the rules of debits and credits:

Let’s continue to explore job costing now by using this accounting system to assign and accumulate direct and indirect costs for each project.

When you are done with this section, you will be able to:

  • Record direct materials and direct labor for a job
  • Record allocated manufacturing overhead
  • Prepare a job cost record

Learning Activities

The learning activities for this section include the following:

  • Reading: Direct Costs
  • Self Check: Direct Costs
  • Reading: Allocated Overhead
  • Self Check: Allocated Overhead
  • Reading: Subsidiary Ledgers and Records
  • Self Check: Subsidiary Ledgers and Records
  • Introduction to Accumulating and Assigning Costs. Authored by : Joseph Cooke. Provided by : Lumen Learning. License : CC BY: Attribution
  • Colin Dodds - Debit Credit Theory (Accounting Rap Song). Authored by : Mr. Colin Dodds. Located at : https://youtu.be/j71Kmxv7smk . License : All Rights Reserved . License Terms : Standard YouTube License
  • What the General Ledger Can Tell You About Your Business. Authored by : Mary Girsch-Bock. Located at : https://www.fool.com/the-blueprint/general-ledger/ . License : All Rights Reserved . License Terms : Standard YouTube License

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COST ASSIGNMENT Definition

COST ASSIGNMENT involves assigning costs of an account to the accounts that are responsible or accountable for incurring the cost. For example, the cost of issuing purchase orders is allocated to the various objects procured. The cost assignment is done through assignment paths and cost drivers. The assignment path identifies the source account (the account whose cost is being assigned "Issue Purchase Orders" in the above example) and destination accounts (the accounts to which the costs are being allocated the various cost objects procured by issuing purchase orders in the above example). The cost driver identifies the measure or rationale on the basis of which the assignment needs to be done, that is, whether the costs of issuing purchase orders need to be assigned to various cost objects evenly, based on some defined percentage values, or based on some criterion, like the number of purchase orders of each cost object issued. Defining the cost drivers and assignment paths (i.e., source and destination accounts) enable proper assignment and accounting of the various costs incurred in the organization.

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assignment on cost accounting

Unit 10 Assignment 1

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6.4: Assignment- Cost Behavior Patterns

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For this assignment, you will download and complete the following worksheet:

  • Assignment: Cost Behavior Patterns (.docx)
  • Assignment: Cost Behavior Patterns. Authored by : Linda Williams. Provided by : Lumen Learning. License : CC BY: Attribution

Assignment on Cost Accounting

Cost accounting is an approach to evaluating the overall costs that are associated with conducting business. Generally based on standard accounting practices, cost accounting is one of the tools that managers utilize to determine what type and how much expenses is involved with maintaining the current business model. At the same time, the principles of cost accounting can also be utilized to project changes to these costs in the event that specific changes are implemented.

=> Cost accounting is an approach to evaluating the overall costs that are associated with conducting business. Generally based on standard accounting practices, cost accounting is one of the tools that managers utilize to determine what type and how much expenses is involved with maintaining the current business model. At the same time, the principles of cost accounting can also be utilized to project changes to these costs in the event that specific changes are implemented.

=> In management accounting, cost accounting establishes budget and actual cost of operations, processes, departments or product and the analysis of variances, profitability or social use of funds. Managers use cost accounting to support decision-making to cut a company’s costs and improve profitability. As a form of management accounting, cost accounting need not to follow standards such as GAAP, because its primary use is for internal managers, rather than outside users, and what to compute is instead decided pragmatically.

Costs are measured in units of nominal currency by convention. Cost accounting can be viewed as translating the supply chain (the series of events in the production process that, in concert, result in a product) into financial values.

=> In modern cost accounting, the concept of recording historical costs was taken further, by allocating the company’s fixed costs over a given period of time to the items produced during that period, and recording the result as the total cost of production. This allowed the full cost of products that were not sold in the period they were produced to be recorded in inventory using a variety of complex accounting methods, which was consistent with the principles of GAAP (Generally Accepted Accounting Principles). It also essentially enabled managers to ignore the fixed costs, and look at the results of each period in relation to the “standard cost” for any given product.

For example: if the railway coach company normally produced 40 coaches per month, and the fixed costs were still $1000/month, then each coach could be said to incur an overhead of $25 ($1000 / 40). Adding this to the variable costs of $300 per coach produced a full cost of $325 per coach.

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COMMENTS

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    cost accounting (acc 311) 7 days ago. Brian & Taylor, a consulting firm, specializes in providing internal audit services for its clients. It bills the clients $170 per hour for its professional services; it costs the firm $95 per hour to cover the cost of its staff. To cover its MOH costs, the partners have always applied MOH costs to clients ...

  2. Cost assignment definition

    November 13, 2023 What is Cost Assignment? Cost assignment is the allocation of costs to the activities or objects that triggered the incurrence of the costs. The concept is heavily used in activity-based costing, where overhead costs are traced back to the actions causing the overhead to be incurred.

  3. Cost Accounting: Definition and Types With Examples

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  4. What is Cost Assignment?

    Cost assignment is a crucial aspect of cost accounting and management accounting, as it helps organizations make informed decisions about pricing, resource allocation, budgeting, and performance evaluation. There are two main components of cost assignment:

  5. Cost Accounting: What It Is And When To Use It

    Cost accounting is a type of managerial accounting that focuses on the cost structure of a business. It assigns costs to products, services, processes, projects and related activities.

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    ACC 311 Module Two Short Paper: Job Order Costing vs. Process Costing Ryann Perkins Southern New Hampshire University. Job Order costing is defined as, "a system for assigning and accumulating manufacturing costs of an individual unit of output.

  7. Mastering Cost Accounting: Case Studies for Student Learning

    At its core, cost accounting involves the process of recording, classifying, and analyzing various costs to enhance decision-making within an organization. By segregating costs into fixed and variable components, businesses gain a clearer understanding of their financial health. In Case Study 1, we delve into the world of manufacturing where ...

  8. Case Study Analysis in Cost Accounting: Tips for Students

    Key Components of Cost Accounting Assignments: In cost accounting assignments, understanding key components is pivotal. Diving into direct and indirect costs, fixed and variable costs, and calculating COGS forms the bedrock.

  9. eCFR :: 48 CFR 9903.302-1 -- Cost accounting practice

    9903.302-1 Cost accounting practice. Cost accounting practice, as used in this part, means any disclosed or established accounting method or technique which is used for allocation of cost to cost objectives, assignment of cost to cost accounting periods, or measurement of cost. ( a) Measurement of cost, as used in this part, encompasses ...

  10. What Are the Types of Costs in Cost Accounting?

    Activity Center: A pool of activity costs associated with particular processes and used in activity-based costing (ABC) systems. Each activity center is separately identified and can be assigned ...

  11. Demystifying Cost Accounting vs. Financial Accounting: Your Guide to

    As you tackle your cost accounting assignment, keep in mind the practical applications of cost accounting in day-to-day decision-making and the broader, long-term implications reflected in financial statements. Balancing these two perspectives is key to becoming a proficient accountant capable of guiding a company towards financial success.

  12. Module 6 Assignment: Cost Behavior Patterns

    Assignment. You have been asked by management to classify the costs associated with the start-up of this new product line. Using the cost information provided below, classify each cost under the appropriate heading according to the chart provided below. Note that some costs may be classified under more than one heading.

  13. Cost accounting: Principles, variants, and career guide

    Elements of cost accounting. According to statistician and author of Cost accounting and costing methods, Harold J. Wheldon, the cost of manufacturing a product or delivering a service can be grouped under 4 different categories: materials, labor, direct expenses, and overheads.. These types of costs are also known as the 'elements of cost accounting.'

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  15. How to Perform Cost Assignment

    So your total assigned cost to produce one artisan-crafted backpack is $42.30. Your equation incorporating your indirect costs looks like this: $42 + ($30/100) + ($500/100) = $42.30. Now you're in a position to determine how much profit you want. If you want to make a $20 profit, you can add that to your cost of $42.30.

  16. Cost Accounting Standards (CAS)

    The cost accounting standards (CAS) consist of nineteen standards promulgated by the Cost Accounting Standards Board (CASB) designed to ensure uniformity and consistency in the measurement, assignment and allocation of costs to contracts with the United States Government. CAS covers a variety of costs such as depreciation, pension plans ...

  17. Introduction to Accumulating and Assigning Costs

    What you will learn to do: assign costs to jobs Financial and managerial accountants record costs of production in an account called Work in Process. The total of these direct materials, direct labor, and factory overhead costs equal the cost of producing the item.

  18. ACCT 303 Cost Accounting

    Study.com ACCT 303: Cost Accounting Assignment #1 - Part(s) 1-4 Job-order costing, process costing, variable costing, and activity-based costing are four different costing methods that modern businesses use to manage their production and operating costs. American Furniture Company (AFC) has reached an annual production of 12000 total units and are deciding which costing method is best for ...

  19. COST ASSIGNMENT DEFINITION

    COST ASSIGNMENT involves assigning costs of an account to the accounts that are responsible or accountable for incurring the cost. For example, the cost of issuing purchase orders is allocated to the various objects procured. The cost assignment is done through assignment paths and cost drivers.

  20. Unit 10 Assignment 1 (docx)

    Unit 10 Assignment 1 Miranda Esposito BUS4064 - Cost Accounting for Planning and Control Rob Shah Due Date March 17, 2023. Q 1. (LO 18-1) 18-45. Core Assets and Capabilities Consider the following well-known companies and their key products and services. Required Identify one thing that is a core capability for each.

  21. ACC202 Mod 3 assignment

    3-2 Assignment: Costing Methods Danielle Olinsky. Department of Accounting, Southern New Hampshire University. ... For my company, Daniel's Plumbing Service, we could use job order cost accounting to help determine how much labor and materials are used for each job per technician. The process cost system separates each department within a ...

  22. Cost Accounting Assignment

    Cost Accounting Assignment - Free download as PDF File (.pdf), Text File (.txt) or read online for free. Students are required to submit all three assignment sets. Total weightage given to these assignments is 30%. Students have to attach a scan signature in the form.

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  24. Assignment on Cost Accounting

    Assignment Cost accounting is an approach to evaluating the overall costs that are associated with conducting business. Generally based on standard accounting practices, cost accounting is one of the tools that managers utilize to determine what type and how much expenses is involved with maintaining the current business model.