Accounting is the collection and aggregation of information for decision makers including managers, investors, regulators, lenders, and the public. Accounting systems affect behavior and management and have affects across departments, organizations, and even countries. This paper will give the reader an understanding about cost accounting. This paper will discuss: Why is cost accounting so important to the success of the firm; what are the various methods of cost accounting and how are they used; how does an operating budget work to discipline a firm’s management; what are the elements of a budget; how are budgets constructed; what is variance analysis and how it is used.
Cost accounting can be described as the process of accumulating, measuring, analyzing, interpreting and reporting cost information that is both useful and relevant to the internal and external stakeholders of a business entity. One of the many benefits of cost accounting is that it turns data into information, knowledge and wisdom about a business entity's operations that is useful for: measuring performance, reducing or managing costs, determining the fees or prices for goods and services, deciding to authorize, modify or discontinue a program or activity. Another benefit is that information on the costs programs and activities may be used as a basis to estimate future costs in preparing and reviewing budget requests. Once budgets are approved and executed, cost information serves as a useful feedback on performance. Moreover, costs may be compared to known or assumed benefits to identify value-added and non-value added activities. “Reliable information on the cost of programs and activities is crucial for the effective management of a business entity's operations. Cost accounting is especially important for fulfilling the objective of assessing operational performance. The objective is to improve the efficiency and effectiveness of operations by furnishing program managers and others with timely and relevant cost-based performance information to allow for continuous improvement in delivering outputs and outcomes to stakeholders (Devilliers, 2007)”. In short, cost accounting is important to a firm because it helps managers make better decisions.
“There are many different methods of cost accounting. Different industries follow different methods for ascertaining cost to their products. The method to be adopted by business organizations will depend on the nature of their production and the type of output (http://rajubrotherhood.com/)”. The following are methods of cost accounting and it uses: •
Job Costing: Job costing is concerned with the finding of the cost of each job or work order. Under this system a job cost sheet is required to be prepared to find out the profits or losses for each job or work order. This type of costing is generally used in construction and hospitals. •
Batch Costing: A batch is a group of identical products. Under batch costing a batch of similar products is treated as a separate unit for the purpose of ascertaining cost. This type of costing is generally used in clothing, furniture, and automobile industry. •
Process Costing: This method is used in industries where production is carried on through different stages or processes before becoming a finished product. Costs are determined separately for each process. The main feature of process costing is that output of one process becomes the raw materials of another process until final product is obtained. This type of costing is generally used in industries like petroleum and paint. •
Operation Costing: This is suitable for industries where production is continuous and units are exactly identical to each other. Under this system cost sheet is prepared to find out cost per unit and profits or loss on production. This method is applied in industries like mines or drilling, cement works etc. To put it simply, an operating budget is the plan you use to make sure you have the money...
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