Cost accounting while doing budgeting in accounting plays a very important role in the budgeting process of a company and a department. For example, cost accounting in budgeting helps decide the future growth plan of a company by analyzing the current financial performance of a company.
So, if you are wondering about what is cost accounting and how to calculate it, then this blog is just for you. Let’s discuss the cost accounting points that will help you in the budgeting of your business and you can enjoy seamless and efficient financial management ultimately.
Let us explain each part in detail so that you know about cost accounting and can include it in your budgeting process!
What is Cost Accounting?
Cost Accounting is a domain of the internal department of a company. They analyze the cost of producing goods and services and how they are contributing to the growth of a company. Moreover, it helps companies decide from where the costs can be reduced to increase profits or reduce prices.
Determining and calculating different types of costs associated with the production process and then analyzing the financial performance is the ultimate goal of cost accounting. When financial analysts compare the input costs of producing goods to the output gains, the financial performance measurement becomes quite easy and makes the decision-making process very smooth and smart for the company.
Role of Cost Accounting in Budgeting
Cost accounting is central to the budgeting in accounting in an organization as it helps companies take a growth path towards achieving higher profits with higher sales. Moreover, it is an important indicator or tool to analyze the cost structure of a company where they can analyze the overall financial health and performance of a company.
So, cost accounting is a crucial part of the budgeting process and different types of cost accounting play several crucial roles, covering all the important aspects of financial planning. Let’s now discuss all the cost types and then the types of cost accounting in budgeting!
Types of Costs
There are four main kinds of costs associated with a business. All other cost types are the subcategories of these main costs. Let’s discuss them one by one!
- Fixed Cost: A firm has to bear the fixed costs regardless of the production activity. In other words, a company has to bear the fixed costs even if they are not producing anything at all. For example, mortgage, lease, rent, and bills.
- Variable Cost: Variable cost depends on the production level. If the production level increases, the variable cost will also rise. On the other hand, if a company lowers the production of goods, the variable cost will also go down. For example, salaries of employees and cost of raw materials, etc.
- Direct Cost: Direct costs are directly associated with the production of goods and services. For example, labour and capital are directly used in the manufacturing of goods, so the money spent on them is the direct cost for the company.
- Indirect Cost: Indirect cost includes the expenditures which are not directly used in the manufacturing of goods. For example, energy does not directly contribute to the manufacturing of goods. Instead, it helps run the machinery that is used in the production of goods. So, expenditures on energy are an indirect cost for a company.
Types of Accounting Cost
There are four types of cost accounting. Let’s discuss all of these types one by one!
1- Standard Costing
Standard costing is very crucial to make a variance analysis. This method consists of two types of costs. One is the actual cost and the other is the accounting cost. Accounting cost is calculated keeping in view the ‘ideal’ cost based on the efficient use of resources in the production of goods and services. A variance is favorable if:
Actual Cost < Standard Cost
On the other hand, variance analysis is unfavorable if standard costs are lower than the actual costs.
Actual costs > Standard Costs
2- Activity-Based Costing
Activity-based Costing, also known as ABC in accounting, helps the managers determine cheaper production methods as well as the individual price of each product. It is useful in making financially vital and viable decisions by analyzing the costs associated with the manufacturing of products. ABC helps in assigning the overhead and indirect costs in the production process. For example, ABC measures the total time and money spent on the production of particular goods.
3- Lean Accounting
A lean accounting has a two-pronged strategy. Using this method, the production managers strive to minimize the waste on one hand and maximize the productivity on the other side. For example, if a manager reduces the time of all employees that they waste on unnecessary tasks and utilizes that time for productive tasks, he can calculate the value-based pricing, ultimately increasing the profitability of a company.
4- Marginal Costing
Marginal costing is the cost of producing an additional product. It helps in short-term decision-making and managers can use it to analyze the different levels of production and the associated costs with them. Moreover, the production and marketing managers can use marginal costing for determining the impact of marketing campaigns, sales price, and potentially profitable products.
Difference between Cost Accounting and Financial Accounting
Many a time people confuse the two closely related terms of cost accounting and financial accounting. Although they are closely linked to each other, there’s a huge difference between them. Cost accounting measures the internal cost of a firm or company. In other words, cost accounting includes all the expenditures occurring on the manufacturing of goods. It consists of all the costs at each stage of production. We can say, cost accounting is important for the company management to make crucial decisions.
On the other hand, financial accounting measures the financial position and strength of a company. Financial accounting helps investors and creditors in making decisions regarding their investments and loans. In financial accounting, investors analyze assets and liabilities and look closely at the revenues and expenses of a company to decide if they should invest in this company or not.
In sum, the financial costs of budgeting in accounting are very crucial to making an important and sound decision to grow their sales and business. It helps the production and marketing managers in several ways. There are different types of cost accounting and the real challenge is to use them at the right time for the right purpose.
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Disclaimer: This article provides general commentary on, and analysis of, the subject addressed. We strongly advise that you consult an attorney or tax professional to receive legal or tax guidance tailored to your specific circumstances.