Cost Accounting

            Cost accounting is an essential specialty within the accounting field. One of the main objectives of industry is to determine the selling price of the products or the cost of services that are furnished by a company. To establish a selling price that ensures a profit, it is first necessary to determine the costs of making the product or of providing the service. This is the purpose of cost accounting, and many of the procedures of other branches of accounting have been adapted to achive this end.

            Basically, there are two kinds of manufacturing. In the first, raw materials are shaped or assembled into a product. Many consumer goods, including automobiles, appliances, furniture, and clothing, are manufactured in this way. In the second, a continuous process that is often chemical in nature change a raw material into some other kind of product. Metals are refined, or purified, from their ores by means of a continuous process. Some agricultural products-like sugar-are also refined in this way. Petroleum products, paper, flour, and cement are other examples of continuous-process manufacturing.

           Because of this difference in manufacturing techniques, there are two principal methods of determining costs. The first method, job-order cost accounting, is suitable for use with the assembly type of manufacturing. It is used to determine the cost of an individual item or of a batch, or job lot, of identical items. The other method, process cost accounting, is suitable for use with the continuous-process type of manufacturing. It differs from job-order costing because it is based on a time period that is usually determined by the nature of the processing.

        In job-order cost accounting, the accountant must first determine the prime, or direct, cost of the product. The prime cost is the sum of direct material costs and direct labor costs.

Direct –material-costs data are obtained through the analysis of three perpetual inventories, thst is, inventories that are maintained at all times. The first is a record of the raw materials on hand; the second is a record of the work in process; and the third is a record of the finished goods.

           The basis for the raw-materials inventory is a “stores” ledger, which is a record of the raw materials on hand. Supporting documents ments for the stores ledger include purchase orders, receiving reports, and store requisition slips. We noted before that accountants use actual business papers whenever they are available. Both the work-in-process inventory and the finished-goods inventory are also supported by ledgers that record the items actually being manufactured or the items in storage waiting to be sold or shipped. The work-in-process ledger is sometimes known as the job-order cost sheet.

           Direct labor and materials costs can be relatively easily identified in making one unit of a product (one book, for example), or a job lot or batch of the end product (a thousand identical books). When the overhead is added to the prime cost, the resulting figure is called the factory cost.

The term overhead covers many different expenses, including the miscellaneous expenses of operating the plant. Depreciation and property taxes for the manufacturing plant, for example, are both accounted for as overhead costs, as is the plant foreman’s salary. Costs are subdivided into fixed, variable, and semivariable categories for the purpose of record keeping. Direct costs often change, affecting the cost of production and consequently the manufacturer’s selling price. A new union contract, for example, may increase labor costs; or a price increase for basic steel products may require a manufacturer to pay more for his raw materials. Many indirect costs are also variable. The salaries of supervisory personnel may rise, or people may be added to the office staff, or more storage space may be necessary. Some indirect costs, however, such as depreciation, are generally fixed.

                Indirect costs may be allocated, or assigned, to different products, job orders, or departments on the basic of a predetermined rate or percentage. This is called the burden rate. Sometimes an effort is made to determine actual indirect costs of each product or activity and to charge them accordingly. However, this is usually very difficult to determine with any degree of accuracy. Thus, a predetermined burden rate is often used.

                One of the method used to allocate indirect costs is to set a burden rate based on the direct labor costs. For example, if a burden rate of $1 for every $10 of direct labor costs is predetermined, indirect costs of $6,000 are added to a job on which the direct labor cost was $60,000. A second method is to establish a burden rate according to the number of hours of direct labor that are accumulated over a period of time. A third method is allocate the indirect  costs on the basis of the number of hours the machines in the factory are used for a particular job. These methods are normally used in job-order costing.

In process cost accounting, th indirect costs are accumulated for the process or for a department over a period of time. As in job-order costing, indirect costs are usually allocated on the basis of a predetermined burden rate. Whereas job-orer cost accounting is supported by inventory ledgers, the process-oriented manufacturing concern maintains cost-acumulation ledgers. These ledgers are often supplemented for greater detail and clarity with cost-analysis sheets.

                Job-order costing and process costing are methods of finfing costs. In addition, there are two systems which analyze these results in detail for the convenience of management. One of these is called full or absorption costing. In this system, all the fixed manufacturing costs become part of an inventory of manufactured goods. In essence, full costing provides an average fixed cost for product.

                The second system is known as direct or variable costing. It is based on the concept that the costs vary according to the volume of the product thas is manufactured, so that an increase in volume will bring about an increase in variable costs. In other words, this system provides an average variable costing believe that it gives management a better basis for making decisions concerning the level of manufacturing activity or the volume of goods to be carried in inventory.

                The financial statements prepared under these two systems vary for any specific period according to the sales made I the same period. At the same time as the statements are issued, various schedules are also submitted to management in order to show detailed costs and to provide explanations when necessary. Such schedules usually give data about the cost of goods sold, the selling expenses, the general and administrative expenses, and nonoperating income and expense items. Management may also require reports of costs, such as the payroll, taxes accrued or paid, production rates, and receipt or shipment both of raw materials and finished goods.

                Cost accounting provides a systematic and logical process by which the cost of a product can be determined. This cost can then be used as a basis for determining the best selling price of a product. It also provides management with an extremely valuable decision-making tool. One way in which this control can be exercised is through the concept of standard cost.  In this system, management establishes a predetermined standard for producing a product. Detailed records are then maintained, establishing variance accounts for various areas where the actual costs differ from the predetermined standard.

Post by : Rony Sutiyanto