Origing of Cost Accounting

Cost accounting which is a management accounting’s part controls and records all the expenditures which a business unit bears for facilitating control on different activities. It is considered as that branch which establishes actual-cost and budget of the operations, product or departments, processes, AOV, fund’s social usage or profitability. For a business unit, cost accounting has been considered an essential tool; because this accounting helps the managers understand better the expenses incurred for running the business.

Cost accounting is a very old accounting method which enabled the managers of the company to understand the cost incurred for running a particular unit. Modern cost accounting came into existence at the time of industrial-revolution. It was originated at that time when complications for running a business in large-scale resulted in system’s development, for tracking and recording costs so as to render help to the business managers and owners for making decisions.

In traditional age of industries, the costs which a business unit used to incur was called as variable-costs by the modern-accountants as these costs directly varied with the production amount. A business unit incurred expenses on raw-materials, labor, power for running the factory and many more expenses related directly with the production of goods and services. Manager calculates a product’s variable cost & uses it as rough idea for making further decisions relating to the production.

Some of the costs of a company do not tend to change (fixed-cost) even at the time of busy-periods, but some costs, i.e. variable costs, fall or rise according to the work’s volume. ¬†Within the managers the fixed cost has gained more significance with the passage of time. Some of the fixed cost examples are: -Plant & machinery’s depreciation. -Department’s cost like:

1) Maintenance

2) Production-control

3) Tooling

4) Purchasing

5) Handling and storage

6) Quality-control

7) Supervision of plant

8) Engineering

In the beginning of 20th century, the above costs were given least importance by many businesses. Whereas these fixed costs, in 21st century, are considered more significant in comparison to the variable-cost incurred for manufacturing an item & allocating these cost to item’s wide range may result in worst decision-making. Fixed-cost must be understood by a manger for making decisions regarding the products & pricing.

Approaches of Cost Accounting

There are many approaches of cost accounting and they are listed below:

1) Standard or standardized cost accounting.

2) Lean-accounting

3) Accounting based on activity

4) Resource-consumption-accounting

5) Throughput-accounting

6) Marginal-costing or cost volume profit analysis

Elements of Cost accounting

The elements of cost accounting are as follows: -Labor -Raw-materials -Overhead or indirect-expense

The overhead element is further grouped based upon the functions performed by it: -Works or production overhead -Administrative overhead -Selling & distribution-overhead