Cost Accounting Introduction - Accounting Basics

What is Cost Accounting?

The application of the accounting and the costing principles, methods and techniques used for ascertaining the costs and analyzing the savings or excess cost in comparison with the previous experience is known as Cost Accounting.

What are the different concepts of Cost Accounting?

The main concepts of cost accounting are as follows:

Cost

Purchase or production of anything involves cost. And depending on the stages of completion cost may differ for the same product. According to the stage, the product is in, the cost changes. The stages may be raw material, work in progress, finished goods. The cost of the product may also vary depending on the constraints and situations of production and market.

Expenses

Some of the cost such as raw material cost, fright cost, labour cost is actual cost while some of the expenses are attributable to cost. Some expenses need to be incurred such as rent, salary, insurance etc in order to earn revenue. The expenses may be fixed, semi-variable or variable.

Loss

Loss adds up to the cost of product or service without adding any value addition to it and losses are incurred without any compensation.

Cost Center

An area of activity that adds cost to the product is known as Cost Center. And each cost center is responsible for the activity and the cost. Cost centers are of three types:

  • Personal and Impersonal Cost Centers – Personal cost center refers to the group of people responsible for a activity, while the activities are carried out by using plant and machinery in impersonal cost center.
  • Operation and Process Cost Centers – In process cost center different kinds of processes are involved and in operation department, operation activity is performed.
  • Product and Service Cost Centers – In product department all the activities related to product are referred and when service is rendered by the center for the smooth functioning, the center is known as service cost center.

Profit Center

Cost centres and revenue activities combine together and constitute Profit centers. Targets are set and responsibilities are delegated to the cost centers by the profit centers. Profit centers play an important role in an organization.

Cost Drivers

Cost of the product depends on the cost drivers. Different types of cost drivers include number of units or types of products required for production. The product cost changes automatically when there is any change in the cost driver.

Conversion Cost

Conversion cost is the cost required for converting raw material into complete product such as labour cost, direct expenses and overhead cost.

Carrying Costs

The cost incurred to maintain inventory, store rent and operation expenses constitute carrying cost.

Out of Stock Cost

Out of stock cost include loss in sale, loss of goodwill or idle machine,

Contribution Margin

The difference between the sale price and the variable cost is known as Contribution margin.

Ordering Costs

The cost incurred to place an order till the stage where material is included as inventory is known as ordering cost.

Development Cost

The cost incurred for developing new product, or improve the existing product or the production method is known as Development Cost.

Policy Cost

In addition to the regular policy, a new policy is implemented and the cost incurred for the same is known as Policy Cost.

Idle Facilities Cost and Idle Capacity Cost

Loss is incurred if any of the facilities remain idle, which is known as Idle facilities cost. Capacity cost is the cost incurred for unused capacity, capacity shut down or any other reason.

Expired Cost

The expired cost is the cost fully consumed and future monetary value could not be measured is known as expired cost. The expenses that are incurred in the accounting period does not have any future value, it is known as expired cost.

Incremental Revenue

The difference in revenue between two alternatives is known as Incremental revenue. Incremental revenues are compared with incremental costs to assess the profitability of an alternative.

Added Value

The value addition to any of the product is known as Added value. The value addition on the product could be because of many reasons, either due to some process on the product or some improvement on he product.

Urgent Cost

The cost incurred on an immediate basis and upon delay may lead to loss in business are urgent costs. Urgent costs are not to be postponed.

Postponable Cost

Without avoiding any expenses, if we are able to defer some expenses to future, then it is called a postponable cost.

Pre-production Cost

The cost incurred before production or at the early stages of project is known as Pre-production cost. Some of the Pre-production cost are capital expenditure and some of them are deferred revenue expenditure.

Research Cost

The cost incurred for discovering a new product or improving the existing product or method or process is known as Research cost.

Training Cost

Training cost is the cost incurred for providing training to the staff or workers in order to improve the skills.

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