Cost accounting refers to a process of accumulating, recording, classifying and analyzing all costs incurred at various levels of production. The purpose of cost accounting is manifold. It provides a final selling price, suggests the best possible course of action where maximum savings are possible and a strategy for future. Cost accounting is also constructive in comparing the input and output results that ultimately aids the management to arrive at a financial statement. It includes tangible as well as the intangible expenses.
Let us look at the various methods of cost classification. 1. By element- On the basis of element, cost is divided into three categories- a)Material- It is one of the most important aspects of production. It is also referred to as raw material or tangible items. Almost 50% of the cost comes under material. For example- cotton, wood, rubber, etc. b)Labour- Obtaining finished products from raw material solely depends on labour. Cost of labour is calculated in the form of wages and salaries.
Expenses- Expenses other than material and labour come under the category of ‘expenses’. For example- rent, insurance, etc. 2. By nature/traceability- On the basis of traceability, cost is divided into two categories- a)Direct/traceable cost- It refers to those costs that are easily traceable or identifiable. For example- wages, salary, cost of timber, cotton, etc. b)Indirect/untraceable cost- It refers to those costs that are not easily traceable of identifiable. For example- lubricants, cotton wastes, insurance, etc. 3.
The Term Paper on Integrated Accounting Final Report
In order to assist in the set up of Riordan Manufacturing’s revenue cycle, some changes are needed. Riordan Manufacturing is going to incorporate the systems development life cycle to their system. Along with this, some detail on how participants in the accounting function will assist in the development of the system will be mentioned as well. There will be information on how the changes ...
By function- On the basis of function, cost may be divided into four categories- a)Production cost- Cost incurred in obtaining finished goods from raw material is referred to as the production cost. b)Administration cost- It includes the cost of strategizing policies, leading the organization, and carrying out the operations. c)Selling cost- The cost incurred on marketing for promotion of sales is called selling cost. d)Distribution cost- The cost incurred on distribution of finished products is called distribution cost. 4.
By behavior- On the basis of behavior, cost can be divided into two categories- a)Fixed cost- Fixed cost is the cost that remains the same irrespective of the size of production. For example- rent, insurance, etc. b)Variable cost- Variable cost is the cost that changes with respect to change in the size of production. For example- material, wages, etc. 5. By control controllability- On the basis of controllability, cost can be divided into two categories- a)Controllable- Cost that can be controlled by the members of an undertaking b)Uncontrollable- Cost that cannot be controlled by the members of an undertaking 6.
By normality- On the basis of normality, cost is divided into two categories- a)Normal cost- It is the cost incurred on regular day to day activities b)Abnormal cost- It is the cost incurred on abnormal events taking place during business operations 7. By time- On the basis of time, cost is divided into two categories- a)Historical cost- It is the cost incurred in the past b)Predetermined cost- It is the cost that is determined before the production process is completed
