Cost Accounting

Basics of Cost and Costing in Management Accounting

What is Cost?

Cost is a word used to describe the money spent on a particular thing. In our private lives, we talk about the cost of running a car or the cost of heating our home. In a business context, we can talk about the cost of labour, or the cost of running a department, or the cost of a particular product or service sold to customers.

Every business organisation incurs costs – whether we are self-employed, or work for local government, or are employed in a profit-seeking organisation. Costs are incurred on the resources consumed by the organisation when carrying out its business objective of satisfying customers. The resources that are consumed are materials, people’s effort, bought-in services, wear and tear on equipment, and even money itself, which has an interest cost.

These running or operating costs are referred to by accountants as revenue expenditure to distinguish them from the initial cost of new physical assets, such as buildings, equipment and vehicles. The acquisition costs of these fixed assets are referred to as capital expenditure. This article is primarily concerned with the former, ie revenue expenditure incurred on the day-to-day running costs of the organization when doing work for its customers and clients.

What is Costing?

Costing is the analysis of costs so that they can be allocated to products/services, activities, departments and specific periods. This objective analysis of costs is typified when they are charged to the end product or department consuming such costs. There is also a need for subjective analysis of costs. This looks at the nature and type of costs and describes them in various ways – for which we later need to learn a little jargon.

Costing is, therefore, an in-house accountancy service to provide relevant information to managers in a timely and cost-effective way. We shall start our study of costing by considering where cost information comes from and how accountants deal with it.

What Type of Information a Costing System Provides?

  1. Cost per unit of production or service or a process
  2. Cost of running a section, department or factory
  3. Wage cost for a unit of production or per period of production
  4. Cost behaviour with varying levels of production

The above examples of the type of information are not mutually exclusive. There can be several other types of information businesses be using from the costing system based on the nature of their business and industry requirements.

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