January 12, 2011
What is cost accounting? Cost accounting as referred to as managerial accounting is a system of accounting used specifically by managers (Lanen, Anderson, & Maher, 2011, p. 6). Cost accounting measures, records and reports information about costs to help managers to form a well informed decisions for an organization (Lanen, Anderson, & Maher, 2011, p. 6). Cost accounting methods and their use, budgets including discipline, construction, and elements, and variance analysis are important aspects of cost accounting as a whole, which is an important tool ...view middle of the document...
4). Elements classified as value chain activities are as follows research and development, design, purchasing, marketing and sale, production, distribution, and customer service (Lanen, Anderson, & Maher, 2011, p. 4). Each individual element adds value to the product, service, and cost. However there is one function that is a valuable component to every element of the value chain in which is the administration function (Lanen, Anderson, & Maher, 2011, p. 5). For example, every organization has a human resource department responsible for hiring personnel for every department within an organization.
Cost accounting has a variety of methods (systems) including operation costing, continuous flow costing, job costing, process costing and ABC (activity-based costing). The three most popular types are job costing and process costing and ABC being the most prevalent today. Job costing tracks costs to individual units or to precise jobs, contracts, or batches of goods (Lanen, Anderson, & Maher, 2011, p. 211). Process costing is used when alike units are manufactured through a series of consistent steps (Lanen, Anderson, & Maher, 2011, p. 212). Activity-based costing is a two-stage product costing method that allocates costs to activities first then to the products based upon the products use of the activity (Lanen, Anderson, & Maher, 2011, p. 319).
Job costing is used in manufacturing companies such as but not limited to aircraft builders, custom motorcycle and automobile manufacturers, and custom designed jewelers (www.wiley.com, 2004). Service companies such as hospitals, accounting firms and repair shops also use the job costing system (www.wiley.com, 2004). The job costing approaches are used when products are simply identifiable as individual units or batches of identical units (Lanen, Anderson, & Maher, 2011, p. 245). Data received from job costing can be used to bid on jobs and price products, control costs and measure the performance of products, customers, departments, and managers (Lanen, Anderson, & Maher, 2011, p. 245).
Process costing is used by companies that produce products that are identical or similar (facweb.northseattle.edu). The cost to produce each unit is virtually the same for each individual unit (facweb.northseattle.edu). Examples of companies that would benefit from process accounting are refineries, paper mills and food processing (facweb.northseattle.edu). Process costing consists of two common methods which are first in, first out and weighted-average costing (Lanen, Anderson, & Maher, 2011, p. 291). FIFO divides current period costs from the beginning inventory and the current period costs (Lanen, Anderson, & Maher, 2011, p. 291). The weighted-average method makes no difference between the beginning inventory and the current period costs (Lanen, Anderson, & Maher, 2011, p. 291). The FIFO method is customarily the most useful because it tracks current and previous costs separately.