This costing methodology is the most proactive of all the methodologies, for it involves the direct intervention of the cost accounting staff in the product design process, with the express intent of creating products that meet preset cost and gross margin goals. The selling price per unit is calculated by adding a certain profit on the cost per units. Traditional costing is one of two ways to assign overhead costs to goods or services. It helps management in fixing reasonable selling prices for the products manufactured or services rendered by public enterprises. A costing methodology that focuses on capacity utilization is called throughput accounting. For example, if management is contemplating the addition of a second shift, cost accounting can be used to derive the additional costs associated with that shift.
The cost of previous year is not same in the succeeding year. Another problem is that comparisons to actual costs tend to focus management attention on labor variances, which have historically been a large part of the cost accounting report package, even though these costs comprise only a small proportion of total production costs in most manufacturing environments. This means that the value of the item to be recorded as an asset or liability is the original amount paid for the item. Fixation of Prices: In many cases a firm is able to fix a price for its products on the basis of the cost of production. As a result, a process costing system must be in place to compile the respective costs undertaken by each group. A cost center is a number or code that identifies the purchases made by a single department.
Together, these financial statements not only help you time your purchases and investments, but also help you figure out strategic ways to cut costs and increase sales. Period to period cost comparison also helps cost control. To help in fixation of selling price: another important objective of cost accounting is to help in fixation of selling prices. Cost accounting: cost accounting is the process of accounting for costs. Moreover, no one cost is suitable for all purposes and under all circumstances.
Reliable comparison Cost accounting provides us reliable comparison of products and services within and outside an organization with the products and services available in the market. Those that make the wrong decision will loose out on the opportunity. Calculating the costs of the goods or services offered is essential for businesses to maintain profitability. Costs can be modeled at different activity levels. If you do choose public accounting, you can do taxes, audit, or consulting and have clients that you work with individuals or business. Cost Containment A business that implements a process costing system can better contain manufacturing expenses.
The current market prices allow individuals or businesses to know exactly where they stand. Accuracy The historical cost does not accurately represent the current market values of items in the financial statements. Therefore, whatever limited information the usual profit and loss account can give in case of a private enterprise, is not available in case of a public enterprise. This results in much better control over overhead costs. Cost Accounting fails to solve the problems relating to work study, time and motion study and operation research.
Thus, this classification is very essential for not only ascertainment of cost but also for profit planning, cost control and decision-making. A part of the benefit resulting from the reduction of the cost is usually passed on to consumers in the form of lower prices. For each of these costing categories, costs are accumulated through a series of transactions before they are finally charged to a specific job. For these reasons, standard costing is now used in a more limited role that in previous years. On the other hand, if batches are very large it involves more of inventory and it has its own advantages. We are now comparing apples to apples, and the underlying data is based on one costing method and accounting principle.
Relative efficiency of different workers With the help of cost accounting, we may introduce suitable plan for wages, incentives, and rewards for workers and employees of an organization. What is important is what it actually costs to purchase. I know for sure thou that a trade surplus and defcit are neither good or bad and eventually have to reverse. Each of these departments has its own budget. In order to assist employees in helping an organisation to reach its strategic business goals, effective human resource managers often gather job related information in a job analysis and job description, which is vital to creating or re-designing jobs which provide employees with a high level of job satisfaction Stone 2002: 123.
There are many ways to value an item, but for accounting purposes there has to be a common method of determining the value to report for the item, particularly assets and liabilities. Lesson Summary The historical cost concept is primarily used in valuating assets in the financial statements. To find out exact cause of decrease or increase in profit With the help of cost accounting, any organization can determine the exact cause of decrease or increase in profit that may be due to higher cost of product, lower selling price or may be due to unproductive activity or unused capacity. Actually, it is the formal mechanism by means of which of products and services are ascertained and controlled. It is helpful to check results of financial accounting with the help of periodic reconciliation of cost accounts with financial accounts.