One of the most crucial concepts in the area of financing and accounting is the concept of cost accounting. This concept works in a way wherein, the organization tries to find out the cost which is likely to be incurred by the organization in the course of carrying out certain categories of activities. This article will provide information regarding whether the costs are being increased to a higher level or not. All these things are going to work well for the organization in a way that, it identifies whether it is incurring costs at a lower rate or higher rate.

What is Cost?

            In the field of accounting, the cost is monetary value of the total amount of money which is being invested in the course of supplies, services, labor, products, and equipment. This is one of the various definitions of cost. There are few other definitions of costs which are likely to be taken into consideration. The definition of cost is dependent upon the manner in which investments are being made in the course of doing the tasks at a particular point of time wherein, proper results are being taken into consideration in a proper and appropriate way without any issue or trouble arising to them.

Types of costs

Type of cost

Definition

Example

Actual cost

This is the cost which is actually being incurred in the course of manufacturing of a good or a service. 

Cost of raw material and wage bill.

Opportunity cost

This is the cost regarding opportunity lost or foregone in case of not taking up a particular task. The money being lost by the organization by not being in the position to carry out a particular activity is an opportunity cost.

If the company has a warehouse but, it is not using it. In case, the organization was using it then, it would have had been a scenario that, it had earned rent from it. The opportunity lost by the organization in the case of earning rent is the opportunity cost.

Sunk Cost

The costs which do not change in the course of business as a result of nature of business are being termed as sunk costs.

Depreciation cost being incurred by the organization is being considered as a very good example of sunk cost.

Incremental cost

These costs are opposite to sunk costs. These costs increase with the increase in the level of activities being carried out by the organization in the course of doing the tasks.

The costs being incurred by the organization as a result of a product recall is being considered as an incremental cost.

Explicit cost

These are the costs which are being actually paid by the firm.

Interest payment and rent payment are few of the costs which are considered as explicit costs.

Implicit costs

These are the costs which are not shown in books of accounts of the organization but can make influence over major business decisions of the organization.

Rent of idle land, depreciation of asset which is not in use, interest on equity are few of the examples of implicit costs.

Book cost

These are the costs which are not exactly paid by the organization but a provision is being made regarding these kinds of costs by the organization in profit and loss statement.

Provision for depreciation and provision for unpaid interest on capital are the examples of book costs being taken into consideration.

Accounting costs

Accounting costs are the outlay cost which is already being incurred in the production of a particular process.

All sunk costs are considered to be accounting costs.

Economic costs

These are the future costs which are not being incurred by the organization but play a crucial role in the course of the organization working.

These are similar in comparison to opportunity costs and implicit costs.

Direct cost

These costs are directly related to manufacturing within the organization.

These kinds of costs include the cost of raw materials.

Indirect costs

These are the costs which are not directly related to manufacturing within the organization. The costs of machinery and land are considered to be direct costs.

Elements of Costs

One of the most important things which are being carried out by costing work is to identify the cost of goods sold. The following are the elements of cost which are to be taken into consideration by the organization for doing the tasks regarding costing in a proper way.

  1. Direct material cost: This is a kind of cost which refers to the total cost of raw materials which are being involved directly in the area of manufacturing of a particular product.
  2. Direct labor cost: This is the cost which is being incurred by the organization in the course of labor being used by it for the purpose of carrying out the operations for the purpose of doing the tasks regarding manufacturing.
  3. Manufacturing overhead costs: These are the costs which are other than the direct material cost and direct labor cost which is being incurred by the organization in the area of doing the tasks at a particular point of time.

How to Determine Cost of Goods Sold

            There are certain steps which are required to be carried out by the organization for the purpose of making sure that cost of goods sold is being identified by the organization in a proper and appropriate way.

Step 1: The number of units manufactured and the cost being incurred towards those units is to be identified.

Step 2: For finding out a number of units manufactured, a formula is being required to be used by the organization. The formula is going to include Number of units at the beginning of the work in process + Number of units manufactured - the number of units ending in the process = number of units manufactured.

Step 3: Cost of beginning work in process + Production Cost – Cost of ending work in process = Costs of goods manufactured.

Step 4: When the organization has the total number of units then, the division is required to be made with the cost of goods which are being manufactured by the organization.

What is Cost Accounting?

Cost accounting is a concept which tries to find out the cost of production of the organization by way of capturing the cost of production of the company through assessment of input costs of each of the steps of production is taken into consideration at a particular point of time in the course of doing the tasks.

Types of Cost Accounting

Types of Cost Accounting

Definition

Standard or standardized cost accounting

In case of standard costing, fixed costs fixed costs are being calculated on the basis of variable costs.

Lean accounting

This is a practice which is being linked up with lean manufacturing being carried out by the organization. The purpose of lean accounting is to make sure that, it is being working towards ensuring that, support is being provided to lean manufacturing.

Activity based costing

This is another category of accounting which works towards assignment of costs on the basis of the resources which are being used for carrying out particular kinds of activities. Here, the costs are being divided into three different categories. The categories include fixed cost, variable cost and overhead costs.

Target costing

This is a kind of costing method being used by firms. This is being defined as a maximum amount of cost which can be incurred by a firm for earning profits with the margin being required by it.

Resource consumption accounting

This is a kind of costing which provides support to business managers for the purpose of ensuring that, optimization of business is being ensured.

Environmental accounting

This considers both environmental and accounting information for the purpose of the formulation of the cost of goods sold by the organization.

 

Benefits of Cost Accounting

  1. Standard costing takes into account different kinds of costs being incurred towards a particular product.
  2. Marginal and incremental cost is taken into consideration at the time when there is any kind of change in the course of production process being carried out by the organization.
  3. Accounting principles such as environmental accounting and life science accounting do help the organization in the long run.
  4. All the elements of accounting are being dealt with separately such as the cost of labor, land and raw material

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