Cost Accounting The core of money

Accounting leads the world- without it most businesses will struggle to keep track of their capital! This page will teach you the basics of Cost Accounting- the vital part of making decisions in a company.

Lesson 1: Basics of Cost Accounting

"Product costs. Determine just the variable costs associated with a product and aggregate this information by product. This is typically done using a bill of materials, which is maintained by the engineering department. With this information, you can decide whether the prices being set for products are too low. Any price set below the sum of the variable costs of a product will lose money on every unit sold.

Product line costs. Combine the variable costs of all products in a product line with all of the overhead costs specifically associated with that product line. These additional costs may include the costs associated with the production equipment, factory overhead, marketing, and distribution costs. This information is used to decide whether it is profitable to expand the sales of the product line, or (conversely) to shut down the entire product line.

Employee costs. Determine all aspects of the compensation, benefit, and travel and entertainment costs of employees, and aggregate this information by employee. This information can be compared to employee output to see which employees are the most cost-effective for the organization. It can also be used to determine the savings to be achieved from an employee layoff.

Sales channel costs. The variable costs of products sold through a particular sales channel can be combined with the overhead costs specific to that channel, to determine its profitability.

Customer costs. The variable costs of products sold to specific customers are combined with the other costs that are directly traceable to those customers, to determine the profitability of each one. The result can be a selective reduction in the number of customers with which the company chooses to do business.

Contract costs. All costs assignable to a specific customer contract are compiled, documented, and justified. This information is used to compile billings to customers.

Cost reduction analysis. There is a decline in business, so management is looking for ways to prudently cut costs while retaining the basic functionality of the organization. The related cost accounting is to determine which costs are discretionary, and so can be eliminated or deferred without lasting damage to the business.

Constraint analysis. There is typically a bottleneck somewhere in the company that limits the amount of profit that the business can generate. If so, the relevant cost accounting is to constantly monitor the utilization of this constraint, the costs incurred to run it, and the throughput (sales minus all variable expenses) generated by it". (from

Summarizing lesson 1:

Lesson 2: advantages of cost accounting

Cost object analysis. Revenues and expenses can be clustered by cost object, such as by product, product line, and distribution channel, to determine which ones are profitable or require further support.

Discovers causes. An effective cost accountant not only locates problems within a company, but also drills down through the data to determine the exact cause of the issue, and also recommends solutions to management.

Trend analysis. Costs can be tracked on a trend line to discover expense surges that may be indicative of long-term trends.

Modeling. Costs can be modeled at different activity levels. 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.

Acquisitions. The cost structures of possible acquisition candidates can be examined to see if costs can be pruned in some areas, thereby justifying the cost of the acquisition.

Project billings. If a company is billing a customer based on costs incurred, cost accounting can be used to accumulate costs by project and roll this information into customer billings.

Budget compliance. Actual costs incurred can be compared to budgeted or standard costs, to see if any part of a business is spending more than expected.

Capacity. The ability of a business to support increased sales levels can be examined by exploring the amount of its excess capacity. Conversely, equipment that is idle can be sold off, thereby reducing the asset base of the organization.

Inventory valuation. The cost accountant is usually tasked with accumulating the cost of inventory for financial reporting purposes. This includes charging direct labor to inventory, as well as allocating factory overhead to inventory.(from

Summarizing lesson 2

Things you need to start:


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