Cost Accounting and Management Essentials You Always Wanted To Know

4th Edition

Vibrant Publishers

• Publisher: Vibrant Publishers
• Year: 2019
• ISBN:
  9781949395365
• Edition: 4
• Topic: Business
• Subtopic: Financial Accounting
• Index: Business

• Includes Chapter Summaries and Solutions to Practice Exercises
• Fundamentals and important principles included
• Practical approach for application by business professionals
• Solved examples with real-life business scenarios

Cost Accounting & Management Essentials You Always Wanted To Know: 4th Edition is an introduction to cost accounting for engineers and scientists moving into management roles.

The book covers:

• An introduction to cost accounting
• Cost-Volume-Profit (CVP) analysis
• Activity based Costing
• Other aspects of cost allocation and control
• Decision making using relevant information

About the Series

The Self-Learning Management series is designed to help students, new managers, career switchers and entrepreneurs learn essential management lessons. This series is designed to address every aspect of business from HR to Finance to Marketing to Operations, be it any industry. Each book includes basic fundamentals, important concepts, standard and well-known principles as well as practical ways of application of the subject matter. The distinctiveness of the series lies in that all the relevant information is bundled in a compact form that is very easy to interpret.

Introduction

An accounting system helps capture and organize information related to business transactions. Depending upon the focus it can be divided into two types – Financial Accounting and Managerial Accounting. A Financial Accounting system contains financial statements and disclosures meant for decision makers external to the company. A Managerial Accounting system contains detailed plans and performance reports meant for decision makers within the company.

Cost Accounting provides information required by both types of accounting systems. Another term, Cost Management, is also used frequently. It refers to the approaches and activities adopted by managers to use the company’s resources to increase the value given to customers and to achieve organizational goals. It must be noted that cost management is not synonymous with cost reduction.

In the later chapters we shall look at cost accounting and cost management aspects of accounting. We shall see how cost accounting information helps in short-term tactical and long-term strategic decision making.

Cost Accounting Terms

This section sets a foundation by describing the most important terms used in cost accounting. An understanding of these terms will help in later sections to understand how costs work, how they are reported and how decisions are taken using them.

Cost Object

Cost object is the product or service with respect to which cost needs to be computed. For example, if a car manufacturer wants to assess costs, the cars that they manufacture would be their cost object. Similarly, cost object for a bank would be customer accounts. Costs are classified below on the basis of the cost object. This classification is with respect to the cost object.

Direct and Indirect Costs

Costs are classified under two categories as below:

Direct Costs

These are costs that can be directly traced or caused by a product, service, project, organizational unit, or activity. For example, the cost of steering wheel is a direct cost in the manufacture of a car. Similarly, cost of effort put by a worker in making the doors of the car also amounts to direct cost. Below are some examples of direct cost.

a) Cost of cement used in construction of a building

b) Cost of tires used in building a car

c) Cost of project management consultant in bridge construction

Indirect Costs

These are costs that cannot be directly traced to a single product, service, project, organizational unit, or activity. These costs are allocated rather than being traced to individual products or services as there is no cost-effective way of tracing them directly. This allocation can be done in several ways described in detail later. For example, rent of a plant used to manufacture cars of multiple varieties cannot be directly trace...