Fundamentals of cost accounting

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Fundamentals of cost accounting

Olga Miltsova Cost accounting, often referred to as managerial or management accounting, is the branch of accounting that provides economic and financial information to decision makers within a company.

Cost Accounting - levels, system, examples, manager, model, type, company, business

The idea of providing information for use within the company to aid management to plan, direct, and control operations differentiates cost accounting from other segments of the accountancy profession.

For example, financial accounting serves the public by providing financial reporting via financial statements, financial press releases and such. This public information is prepared and presented based on generally accepted accounting principles GAAPthe broad rules that assure the user of the underlying framework supporting the information.

On the other hand, cost accounting is limited predominantly to use within the company to aid management in the process of making choices that will benefit the stockholders by maximizing company profits that translate into maximizing stockholder wealth.

Since the information is used internally, the information may be presented on any logical basis just so long as it will aid the manager to reach an appropriate, informed decision.

A few concepts in cost accounting, however, form the bridge between financial and managerial accounting topics.

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One such concept is that of product costing for a manufacturing company. Not only is this information used internally in decision making e. While many of the concepts discussed below are applicable to both types of companies, the basis for ease of discussion will be that of a manufacturing company.

Therefore, some of the concepts to be discussed include understanding the distinction between manufacturing and non-manufacturing costs and how these are disclosed in the financial statementscomputing the cost of manufacturing a product or providing a serviceidentifying cost behavior in order to utilize cost-volume-profit relationships, setting prices, budgeting and budgetary controls, and capital budgeting.

These topics will be briefly discussed below. These costs consist of the cost of basic materials and components, plus the costs of labor and factory overhead needed to convert the materials into finished products. Materials and labor can be classified as either direct or indirect in relation to the final product.

Fundamentals of cost accounting

Direct materials are those major components that can be easily traced to the finished good and are accounted for carefully due to their significance to the product. In the case of manufacturing a lawn mower, for example, these types of materials would include the engine, housing, wheels, and handle.

Indirect materials would include those minor items that are essential but which cannot be easily traced to the finished product. Examples of these would be screws, nuts, bolts, washers, and lubricants. One might say that the cost of keeping an account of each of these indirect items exceeds the benefit derived from having the information.

Fundamentals of Cost Accounting

Consequently, the costs of these items are accumulated as part of factory overhead and prorated to products on some appropriate basis. Direct labor refers to the efforts of factory workers that can be directly associated with transforming the materials into the finished product, such as laborers who assemble the product.

Indirect laborers are those whose efforts cannot be traced directly or practically to the finished product. The indirect laborers would include maintenance personnel and supervisors.

Factory overhead includes all factory costs that can only be indirectly associated with the finished inventory, that is, all factory costs incurred in making a product other than the costs of direct materials and direct labor.

Fundamentals of cost accounting

In terms of cost behavior, some of these costs do not change in total even if the number of products manufactured increases or decreases from period to period; the behavior of these costs is said to be a fixed cost. For example, the amount of the monthly factory rent would not fluctuate based on the number of units produced during a particular month.

Other factory overhead costs that change in total in direct proportion to changes in the number of products manufactured are known as variable costs.Book Preface.

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Our primary goal in the fourth edition remains the same as in the previous three editions––to offer a cost accounting text that lets the student see the development of cost accounting tools and techniques as a natural response to decision making.

Cost accounting, often referred to as managerial or management accounting, is the branch of accounting that provides economic and financial information to decision makers within a company.

The idea of providing information for use within the company (to aid management to plan, direct, and control. The Associate of Arts with a concentration in Accounting Fundamentals program has been reaffirmed for accreditation until by the Accreditation Council for Business Schools and Programs (ACBSP) – and prepares you to work in the accounting a student, you'll focus on accounting in key business practices, including strategy, .

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