Cost Accounting – A Brief Guide

Cost Accounting

“Cost accounting” refers to the methodologies, philosophies, and techniques of accounting used by business enterprises in the UK. It also involves the measurement of costs of activities, items, or transactions and their allocation to achieving certain strategic objectives. Cost accounting methodologies form the basis of allocating resources among competing strategies and projects and are implemented in many organizations both large and small. Cost accounting is a key principle of business activity and it aims at providing decision-makers with timely and accurate information needed for making successful decisions. Cost accounting is based on two concepts:

Determining the Costs

Cost accounting employs different methods of determining the costs of activities and this includes the establishment of a wide range of concepts, models, values, policies, and assumptions. A variety of approaches are applied in cost accounting such as the one called project costing. Project costing is based on what an entity would need to do to achieve its objectives, the values of these objectives and their relationship to the cost of doing the activity, and finally the net present value of the activity. Cost accounting techniques include cost managers who are responsible for the identification of key risks and opportunities, analyzing the effect of changes in these risks and opportunities on the performance of an organization, devising methods for mitigating these risks and opportunities, and maintaining systems for the collection, recording, analysis and reporting of costs. The cost accounting job order of a cost accountant is to first establish a requirement, develop cost management policies, develop a model to satisfy the requirement, and maintain a system to report activity-related costs.

Cost accountants first establish a requirement and then use process costing to estimate the direct and indirect costs of implementing the required action. For example, if the requirement calls for the purchase of fifty printed leaflets a month then the cost per leaflet will be approximately one-twentieth of one penny per leaflet. In the same way, if the required expenditure is the construction of a steel factory then the job cost will be approximately twenty cents per square foot. If the required expenditure is the hiring of labor, then the cost per hour of labor will be approximately three dollars an hour. Thus, if the requirement is to produce fifty thousand leaflets in a month then the job cost will be approximately twelve thousand dollars.

Developing a Sponsored Award Table

The next step in the process involves developing a Sponsored Award Table that provides a matrix showing all the costs associated with the production and distribution of printed literature. The Sponsored Award Table must be based on a reasonable assumption of future sales for the duration of the project. One of the important considerations in determining the validity of this requirement is the number of newspapers to be produced. If the expected revenue for the project is minimal then the size of the budget should be established with an emphasis on newsprint rather than a glossy magazine. Also, the cost accounting job order should be bounded by appropriate limitations such as ceiling, floor, and labor costs incurred during the period of service.

Accounting Reference Document

The next step is to establish the environment in which the activities of the undertaking will take place. This can be done by developing an Environmental Accounting Reference Document (ERAD). The environment is a combination of physical conditions, operational procedures, cost accounting, and other factors. Based on the ERAD the cost accounting methodology will be tailored to the extent necessary to achieve the objectives of the planned activity. This process is known as environment accounting where the development of an Environmental Accounting Reference Document becomes the first step in cost accounting.

Undertaking a Project 

The third step is for a company to determine its baseline costing prior to undertaking a project. The Baseline Costing involves the creation of a project accounting base that is a reasonable description of the existing costs of producing the goods or services involved in the project. The Baseline Costing is used as a baseline for all subsequent costing transactions. It helps to determine whether the net costs incurred are within the planned budget. Once the baseline costs are established, all subsequent costs can be determined by appropriately adjusting for the variations noted in the baseline.

Sponsored Award Accounts

The final step involves a review of all Sponsored Award accounts. The review involves comparing the costs incurred under each Sponsored Award with the baseline cost to get a comparison between similar projects. All Sponsored Award costs incurred must be included for the purpose of budget analysis.

The fourth stage involves evaluating the results of all the above activities and getting feedback from management as well as users about what kind of changes can be made. The goal is to identify what needs can be better met through better cost management. In most cases, companies have a long way to go in terms of improvement in their Cost accounting practice. However, with an understanding of four basic stages that need to be followed in cost-effective project management, the Company’s bottom line can improve in a significant way. This in turn can help to drive up the company’s growth and revenue levels and help them meet its business objectives.