Економіка: облік та аудит

Cost of accounting

Educational and Research Institute of Economics and Management, NUFT

Dariia Kholodenko, Irina Khilchenko

Cost accounting is a type of accounting process that aims to capture a company's costs of production by assessing the input costs of each step of production as well as fixed costs such as depreciation of capital equipment. Cost accounting will first measure and record costs individually, then compare input results to output or actual results to aid company management in measuring financial performance.

Cost accounting involves calculating the costs of different products or services, so company managers can know what price to charge for particular products and services and which are the most profitable. Direct costs are those that can be directly related to the production of particular units of a product: quite easy to calculate. Examples include manufacturing materials and manufacturing wages. But there are also indirect costs or overheads: costs and expenses that cannot be identified with particular manufacturing processes or units of production. Examples include rent or property taxes for the company's offices and factories, electricity and heating, the maintenance department, the factory canteen or restaurant, managers' salaries, and so on. Costs such as these are often grouped together on the profit and loss account or income statement as Selling, General and Administrative Expenses.

Cost accounting involves the techniques for:

· determining the costs of products, processes, projects, etc. in order to report the correct amounts on the financial statements, and

· assisting management in making decisions and in the planning and control of an organization.

For example, cost accounting is used to compute the unit cost of a manufacturer's products in order to report the cost of inventory on its balance sheet and the cost of goods sold on its income statement. This is achieved with techniques such as the allocation of manufacturing overhead costs and through the use of process costing, operations costing, and job-order costing systems.

Cost accounting assists management by providing analysis of cost behavior, cost-volume-profit relationships, operational and capital budgeting, standard costing, variance analyses for costs and revenues, transfer pricing, activity-based costing, and more.

Cost accounting had its roots in manufacturing businesses, but today it extends to service businesses. For example, a bank will use cost accounting to determine the cost of processing a customer's check and/or a deposit. This in turn may provide management with guidance in the pricing of these services.

Scholars have argued that cost accounting was first developed during the industrial revolution when the emerging economics of industrial supply and demand forced manufacturers to start tracking whether to decrease the price of their overstocked goods or decrease production.

During the early 19th century when David Ricardo and T. R. Malthus were developing the field of economic theory, writers like Charles Babbage were writing the first books designed to guide businesses on how to manage their internal cost accounting.

By the beginning of the 20th century, cost accounting had become a widely covered topic in the literature of business management.

Traditional cost accounting essentially allocates cost based on one measure, labor or machine hours. Due to the fact that overhead cost has risen proportionate to labor cost since the genesis of standard cost accounting, allocating overhead cost as an overall cost has ended up producing occasionally misleading insights.

Some of the issues associated with cost accounting is that this type of accounting emphasizes labor efficiency despite the fact that it makes up a comparatively small amount of the costs for modern companies.

Fixed Costs are costs that don't vary depending out the amount of work a company is doing. These are usually things like the payment on a building, or a piece of equipment that is depreciating at a fixed monthly rate.

Variable costs are tied to a company's level of production. An example could be a coffee roaster, who after receiving a large order of beans from a far-away locale, has to pay a higher rate for both shipping, packaging, and processing.

Operating costs are costs associated with the day-to-day operations of a business. These costs can be either fixed or variable depending.

Direct costs is the cost related to producing a product. If a coffee roaster spends 5 hours roasting coffee, the direct costs of the finished product include the labor hours of the roaster, and the cost of the coffee green. The energy cost to heat the roaster would be indirect because they're inexact, hard to trace.

Therefore, сost of accounting is a valuable tool you use to reduce and eliminate costs in a business.

In contrast to financial accounting (which considers money as the measure of economic performance) cost accounting considers money as the economic factor of production.

References:

1. Eldenburg, Leslie G., and Susan K. Wolcott. Cost Management: Measuring, Monitoring, and Motivating Performance. John Wiley & Sons, 2004.

2. Regulations (standard) accounting 31 "Financial expenses", approved by the Ministry of Finance of Ukraine of 28.04.2006 p. 415 number [electronic resource]. - Access: URL: http://zakon2.rada.gov.ua/laws/show/z0610-06.

3. Financial and management accounting national standards: a textbook. 2016

Scientific supervisor: L. Vlasenko.