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.

Each corporation incurs costs – regardless of whether we are self-employed, work for local government, or work for a profit-seeking organisation. Costs are incurred when an organisation consumes resources to accomplish its business aim of customer satisfaction. Materials, human work, purchased services, equipment wear and tear, and even money itself, which has an interest cost, are used.

Accountants refer to these ongoing or operational expenditures as revenue expenditures to differentiate them from the initial cost of new physical assets like buildings, equipment, and vehicles. Capital expenditure refers to the expenditures associated with the acquisition of these fixed assets. This article focuses on the former, i.e. revenue spent on the organization’s day-to-day operating expenditures associated with performing work for its customers and clients.

What is Costing?

Costing is the process of analysing expenses in order to assign them to specific products/services, activities, departments, and time periods. This objective cost analysis is exemplified when costs are allocated to the final product or department that consumes them. Additionally, subjective cost analysis is required. This section examines the nature and types of expenses and explains them in a variety of ways – for which we will need to pick up some jargon later.

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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