Accounting
2021-06-30
Mr. Wasim Firoz

Everything About Cost Accounting

What Is Cost Accounting?

Cost Accounting is a method of managerial accounting that helps the company to identify the real cost of the production by calculating several types of costs. It’s important to remove and eliminate the useless cost from the production of the goods and services. Cost accounting plays a vital role in determining the final cost of the goods to earn a reasonable profit. The objective of cost accounting is that a company can make better financial decisions, improve the net margin on the product, and put an accurate budget on a particular project.

Cost Accounting is used to determine the fixed and the variable cost of the good and service production department by the company internal management. It calculates both the costs then compare the input cost with results, to help the business manage the financial performance. Cost accounting includes several types of costs such as indirect cost, fixed costs, operating cost, direct cost, and Variable cost.

Let’s familiarize ourselves with the formulas that we use in cost accounting.

We use the Formulas to reduce and eliminate the cost that you should know. By using these formulas you can easily identify the product price and increase the profit margin.

Contribution Margin - Contribution margin = sales – variable costs
Target Net Income - Target net income = sales – variable costs – fixed costs
Breakeven Formula - Profit ($0) = sales – variable costs – fixed costs
Pre-Tax Dollars Needed for Purchase - Pre-tax dollars needed for purchase = cost of item ÷ (1 – tax rate)
Gross Margin - Gross margin = sale price – cost of sales (material and labor)
Efficiency Variance - Efficiency variance = (Actual quantity – budgeted quantity) × (standard price or rate)
Price Variance - Price variance = (actual price – budgeted price) × (actual units sold)
Ending Inventory - Ending inventory = beginning inventory + purchases – the cost of sales
Variable Overhead Variance - Variable overhead variance = spending variance + efficiency variance

Types of Cost

Fixed Cost - Fixed cost doesn’t vary on the production level. It’s used for lease payment, mortgage, and any other equipment that is depreciated.
Direct Cost - It’s directly related to the production. For example, Company takes an hour to finish the product. Now indirect cost, we calculate the material cost and an hour labor cost.
Variable Cost - Variable cost is also related to product production. Often Variable costs fluctuate.
Operating Cost - It’s related to the day-to-day operational work of the business. This cost may be fixed or variable depending upon the situation.

Types of Cost Accounting

Activity Based Costing - Activity based costing is also known as ABC costing. It includes the cost of the activities of the business, it may be a special task, event, work for a special goal, etc. It helps businesses to identify the product that is not profitable. It reduces the product production cost and helps in reorganizing the production for a particular product and service.
Standard Cost Accounting - It is an old and popular method of accounting. Standard cost is based on the use of labor and raw material to produce the goods under the standard operating conditions. It assigns the budget and saves time and money.
Marginal Costing - It helps the management to identify the effect of different levels of cost and volume on profit. It can be used to determine the potentially profitable products, existing product price of sale, and effect on the marketing campaign. The marginal cost impacts the production cost by adding an additional unit of the production.
Environmental Accounting - Impact on the cost of goods and services on the environment. Environment accounting helps the management to consider that the product production will be expensive. Environment accounting includes.
- Prevention in technology
- Taxes, fines, and penalties
- Wastage of the management cost
- Technology to prevent the pollution
Lean Accounting - Lean Accounting is very beneficial for the management to improve the financial practice. With the help of lean accounting, the accounting department can reduce the expenses on the production and also save time so that labor can be more productive on the valuable task.
Target Costing - It helps the management to consider the cost in advance that we need to pay the production department. It helps the company to earn consistent profit.

Difference Between Cost Accounting and Financial Accounting

Comparison	Cost Accounting	Financial Accounting
Meaning	Cost Accounting tracks the various costs of the production department.	Financial accounting presents the financial health real picture of the management.
Information	Record the information about the production departments like labor, overhead, and raw material.	Record each monetary transaction properly in the business accounts.
Who uses it?	It’s used by internal management like employees, managers, directors, and supervisors.	It’s used by both internal and external users like managers, directors, shareholders, creditors, etc.
Type of cost uses	Historical and current cost is used in cost accounting.	Only historical financial accounting is used.
Reporting Time	In cost accounting report is shared with management frequently.	In financial accounting, a report is shared with the management once a year, commonly at the end of the financial year.
Purpose	To reduce the cost of production.	Keep a full record of every financial transaction.
Forecasting	With the help of budgeting techniques forecasting is possible.	Not possible.

Check out The Difference Between Accrual and Cash Accounting

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