Tap to Read ➤

What Is Cost Accounting

Azmin Taraporewala
When one indulges in business, cost accounting is the most essential component that systematically evaluates the costs that the organization incurs.
Cost accounting, also termed managerial cost accounting, functions on set standards that the managers of the organization comply with, in order to measure the expenses and determine the utilization of resources that the current business structure demands.
It aids in curbing unnecessary utilization of resources. If the resources are negatively exploited, it can be used to study the cost of production and further analyze the business cycles in order to understand the actual reason behind the rising production costs.
Thus, the escalation of the production costs can be curbed when this approach is put into practice. Cost accounting proves to be helpful when the organization plans to undertake the program of launching a new product.
The cost incurred for the purpose of production is taken into consideration by cost accounting coupled with a detailed market evaluation to comprehend if the product will do well if introduced into the market.

What Are Cost Accounting Systems?

After explicating the concept of managerial accounting, we now move on to determining what are the systems that cost accounting is subjected to. The cost accounting systems have three basic arenas on which it concentrates and accordingly basis its theories.
  • Measurement of Cost: This area consists of methods in order to determine the variables involved in accordance with the cost, to set the principle basis of cost evaluation and thereby developing the prescribed alternative cost measurement techniques.
The use of historical cost, market value, present value or utilization of actual cost, are the alternatives that can be implemented.
  • Assignment of Cost to Cost Accounting Period: This method is used to determine the cost that needs to be assigned for a particular cost accounting period determining the amount of cost to be assigned to individual cost accounting periods.
  • Allocation of Cost to Cost Objectives: This method aids to analyze the allocation of direct and indirect cost.

What Are Cost Accounting Standards?

Cost Accounting Standards (CAS) are developed in order to bring about sustainability in the measurement leading to allocation of costs for contracts owned by the government. The foundation of these set standards lie in the accounting process and practices prevailing in the industry meticulously observed and studied. There are 20 cost accounting standards formulated, which will explain in detail what is cost accounting.
  • 401 Consistency in Estimating, Accumulating, and Reporting Cost
  • 402 Consistency in Allocating Costs Incurred for the Same Purpose
  • 403 Allocation of Home Office Expenses to Segments
  • 404 Capitalization of Tangible Assets
  • 405 Accounting for Unallowable Costs
  • 406 Cost Accounting Period
  • 407 Use of Standard Costs for Direct Material and Direct Labor
  • 408 Accounting for Costs of Compensated Personal Absence
  • 409 Depreciation of Tangible Capital Assets
  • 410 Allocation of Business Unit General and Administrative Expenses to Final Cost Objectives
  • 411 Accounting for Acquisition Costs of Material
  • 412 Composition and Measurement of Pension Cost
  • 413 Adjustment and Allocation of Pension Cost
  • 414 Cost of Money as an Element of the Cost of Facilities Capital
  • 415 Accounting for the Cost of Deferred Compensation
  • 416 Accounting for Insurance Costs
  • 417 Cost of Money as an Element of the Cost of Capital Assets under Construction
  • 418 Allocation of Direct and Indirect Costs
  • 419 Reserved
  • 420 Accounting for Independent Research and Development and Bid and Proposal Costs

What Is Historical Cost Accounting?

The historical cost, defined under the U.S. GAAP, or Generally Accepted Accounting Principles, is the original cost of the asset that the buyer has paid for. For instance, liquid assets are recorded on the balance sheet, keeping in mind the historical cost of the asset.
Securities that are made available, are recorded in accordance to the market value of the said asset. After the asset has been purchased, historical cost and the market value do not sustain any significant delegation with each other.

What Is Full Cost Accounting?

Full cost accounting is an essential tool in cost accounting system through which business organization assimilate and analyze the financial scenario of the business. Decisions related to business are presented with the help of this method.
Internal and external factors are taken into account when culminating certain decisions. Decisions are also based with regards to a study of opportunity costs. Opportunity cost analysis can be defined as the viable options that are made available to choose as the next best option to carry on with certain business operations.
Cost accounting is assayed one behooving practice to help the profits of the company peak while drawing a fiscally compatible budget, with an aim to regulate the finances of the company.