January 10th, 2018
Methods of Cost Accounting and Their Use
Cost accounting methods are highly varied since, unlike for financial accounting, firms are not required to follow a laid down set of standards in the costing process. Entities for instance adopt the method of costing that is useful for a given purpose and hence the method employed could change over time. Further costing objects could differ depending on the purpose of evaluation. When taken as a method of cost measurement various methods can be thought of to comprise cost accounting. Such would include activity-based costing, variable costing and absorption costing. In terms of systems on the other hand cost accounting approaches include job costing, process costing and batch costing.
Cost measurement provides the basis for instituting other cost accounting processes such as cost management which is exemplified by the budgeting process. Activity-based costing for instance assesses the costs of products and services based on previously identified activities in the entity (Rappold, Kline, Bond, & Wiedenbeck, 2009). This is especially important in organizations where overhead cost allocation methods may not produce credible information for managerial control (Rappold, Kline, Bond, & Wiedenbeck, 2009). Variable/ marginal/ direct costing on the other hand considers the costs that are directly incurred for the manufacture of a product. Costs that change with increase in production such as direct labor are referred to as marginal costs while those that do not change for a given range of production are identified as fixed costs. This mode of costing provides management with credible decision making information in cases such as special order decisions and economic ordering level (Kloock, & Schiller, 1997). Unlike marginal costing, absorption costing takes into account fixed overhead costs in measuring the cost of a product or service and it is the required approach for presenting inventory values in external reports.
Costing systems could either be standard or actual, where standard systems provide measurement of products or services at their previously budget predetermined values. These provide information with which to analyze variances between budgeted and predetermined costs. Actual systems on the other hand provide real values at which products are acquired hence not very useful in variance analysis (Bamber, Braun & Harrison, 2007). Both systems can be used either under job costing or process costing. When individual orders differ significantly making it impossible to employ an uniform set of cost estimation for all orders then job costing is used. Each order’s costs are amassed separately with the order/job to which costs are assigned forming a cost unit. For process costing on the other hand, inter-department product flow makes it difficult for individual- product costs assignment (Bamber, Braun & Harrison, 2007). In such a case then the costs attributable to a department during the period which a product flows through is allocated by average among the units produced from the department in that period to find out the unit cost (Bamber, Braun & Harrison, 2007). On progression to the next process the units carry along the costs from the previous process until the final process is reached. A variant of process costing is batch costing. In this system the products flow through different departments is divided into batches with each batch being allocated its respective proportion of the department costs (Bamber, Braun & Harrison, 2007). To find unit costs the allocated cost to a batch is averaged among the units that make up each batch. The costing system selected by an organization is influenced by a number of factors some of which include: existence of joint or by-products, production cycle length, and the size of the product or project that influences its divisibility into cost allocation units.