Types of Cost Accounting

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Types of Cost Accounting

There are mainly four types of cost accounting: standard cost accounting, activity based accounting, lean accounting and marginal costing. Details as per below:

Standard Cost Accounting

Standard cost accounting uses ratios called efficiencies that compare the labor and materials actually used to produce a good with those that the same goods would have required under "standard" conditions. As long as actual and standard conditions are similar, few problems arise. Unfortunately, standard cost accounting methods developed about 100 years ago, when labor comprised the most important cost of manufactured goods.

This type of cost accounting uses different types of ratios to compare how efficiently labour and materials are being used (or can be used) to produce goods and services in standard conditions. One of the issues associated with standard cost accounting is that it emphasizes labour efficiency even though labour costs make up small percentage of costs in modern companies.

The costs that should have occurred for the actual good output are known as standard costs, which are likely integrated with a manufacturer's budgets, profit plan, master budget, etc. The standard costs involve the product costs, namely, direct materials, direct labor, and manufacturing overhead.

Lean Accounting

Lean accounting has some principles and processes that provide numerical feedback for manufacturers implementing lean manufacturing and lean inventory management practices. Traditional accounting system recognizes inventory as an asset even if the inventory sits on the shelf for a year and has holding costs associated with it.

An extension of the philosophy of lean manufacturing and production developed by Japanese companies, lean accounting emphasizes on value-based pricing and lean-focused performance measurements.

Marginal Costing

Also called cost-volume-profit analysis, this type of cost accounting involves analysing the relationship between the company’s products, sales volume, production amount, profits, costs and expenses. This relationship is known as the contribution margin, which is calculated by subtracting the variable cost from revenue, dividing the remainder by revenue. It gives the management a useful insight into potential profits, the most profitable sales price and type of marketing needed.

 

In cost accounting, money is viewed as the economic factor of production. In contrast, money is viewed as the measure of economic performance in financial accounting. Because cost accounting is used as an internal management tool, it does not have to adhere to any specific standards and varies from one company to another. If you are having a problem getting your cost accounting right, source out for the best accounting services in Singapore and they will help you get your accounts straightened out.

 

Activity Based Cost Accounting

This type of cost accounting is defined as “An approach to the costing and monitoring of activities which involves tracing resource consumption and costing final outputs, resources assigned to activities, and activities to cost objects based on consumption estimates.” It involves accumulating the overheads from each department and assigning them to specific cost objects, such as products, services and customers. Activity based costing is considered to be more accurate and, as such, more useful to managers in understanding the cost and profitability of their company’s products and services.

This costing system is used in target costing, product costing, product line profitability analysis, customer profitability analysis, and service pricing. Activity-based costing is used to get a better grasp on costs, allowing companies to form a more appropriate pricing strategy. 

The formula for activity-based costing is the cost pool total divided by cost driver, which yields the cost driver rate. The cost driver rate is used in activity-based costing to calculate the amount of overhead and indirect costs related to a particular activity.