February 22, 2014
If you are starting out in a new business, especially a service/manufacturing business, understanding the cost accounting system and which cost accounting system will work best for your company, is the first step to being successful. Once you find someone to help you navigate those waters, let them help you sail the rough seas of direct and indirect inventory, direct and indirect labor costs, and how to allocate factory overhead as well. While it all may sound confusing, having the right person with the right knowledge and advice, can make all the difference to you and the success of your business. We learned in Chapter 19 that cost accounting systems calculate, register, and record product costs. Once these costs have been recorded, administrators and supervising personnel can use these costs for setting their product prices, controlling operations and developing financial statements. These reports can play an important role in the financial decision making process for your company so it is imperative that they are accurate and detailed.
There are two different types of cost accounting systems. There are called job order cost systems and process cost systems. While both systems are used by manufacturing companies, the job order cost system is used by companies that manufacture custom products or groups of products that are alike. The process cost system, on the other hand, is chosen by manufacturing companies that make units of a product that are impossible to tell apart and are produced using a continuous production process.
Once you have chosen your type of cost accounting system, you will need to know what types of costs that will need to be reported and the difference in those costs.
First, you have direct materials cost and indirect materials cost. Direct materials costs are materials that will be used as an essential part of the finished product. For example, for an electrician, direct
Cited: Bragg, Steven, “What are Indirect Materials?” Questions & Answers – Accounting Tools 1 June 2013. Warren, Reeve and Duchac. ACCT 1101 Chapters 18-26 Managerial Accounting. Ohio: Cengage, 2012. Print. I