What are Cost, Costing, and Cost Accounting? Concept Explanation on Vedantu
The three terms, Cost Accounting, Costing and Cost, all are associated integrally with studies of fundamentals of accounting. Knowing them by heart is essential to continue understanding accounting in depth. The following essay is prepared with the aim of clearing the concept of all the three terms here and other things related to them.
Cost Accounting
When a company or organization’s cost accounting is in discussion, their business practice is referred to that involves the complete list of spending done by the company and recording them too for the purpose of summarizing and examining afterwards. The spending might be for various reasons such as acquiring a product or service, completing a process and others.
This way the cost spent can be studied and controlled if the need arises. Strategic plans can be formulated on the basis of cost accounting and cost efficiency is thus improved. The company authority is also aware of the cost information with improved visibility. Which areas need more cost approval and which section can do with lesser amounts sanctioned, can be identified from this.
The business practices, in which the company’s cost spent on any production process is recorded, examined, summarized, and studies are referred to as cost accounting. With the help of cost accounting, a company can control the cost and accordingly make strategic planning and decisions to improve cost efficiency. The management is able to analyze their cost information with the help of cost accounting and helps to create a future plan for the company.
Cost Accounting can be classified into various types which include marginal costing, activity-based costing, standard cost accounting, and lean accounting. With the use of them the costs of goods and services and the expenditure made, both can be calculated. All the expenditures made are formatted in an organised way so that cost control is done efficiently by the management. Cost of selling, production cost and distribution cost all are determined from cost accounting.
Characteristic Features of Cost Accounting
Some of the characteristics of cost accounting are listed below-
It is a branch of accounting involving the cost of goods and services.
Management is able to analyze the data which helps in decision-making and budgeting for the future. The data achieved is used in financial accounting.
It is the sub-field for accounting where the process for accounting of costs is studied. The costing data that are recorded in this helps the management in developing the budget. It is also used in future planning and decision making processes by the organisation.
Certain standard costs and budgets can be established with the help of cost accounting.
Whether a particular process adapted by the company is efficient or not can be determined from this data.
Costing data is provided that further helps in fixing the prices of products.
It helps to predict the amount of wastage of time and resources.
Types of Cost Accounting
There are mainly four types of Cost Accounting namely,
Standard Accounting
Lean Accounting
Marginal Accounting
Activity based Costing
Let us study the various types of cost accounting.
Standard Cost Accounting- The cost that could have incurred for the production of a particular product or service and the cost that actually have incurred are compared by the companies. This is known as standard accounting. In this type of cost, the manufacturers identify and analyze the differences between the actual costs in the production of these goods and the costs that were predicted by them in order to produce those goods.
Lean Accounting- Manufacturers collect the processes and principles to access numerical feedback so that they can implement lean inventory and manufacturing practices. This is known as lean accounting. This system is for the lean organization that provides the necessary financial and nonfinancial information which is relevant in order to execute the lean strategy and drive financial success.
Marginal Costing- In this type of costing, all the costs are divided separately into variable and fixed costs. The former is directly proportional to production levels. But in this case the cost per unit, though a variable, remains unchanged. The latter, fixed cost, is not associated with production levels. Here, though production quantities vary, the cost remains fixed. Or in simple terms, the fixed costs do not have any relation to the level of production while the variable costs change as there is a change in the production level.
Activity-Based Costing- As the name suggests, this method identifies activities in an organisation and allots cost of each of those activities as per the consumption. In this method overhead and indirect costs are also assigned. In this type of costing, all the costs of the various activities in an organization are identified, and then accordingly the costs are allocated to these activities. Then the costs that are accumulated in these activities are further assigned to the products on the basis of the activities that go into the production of these products and the number of resources that are consumed by these activities.
Objectives of Cost Accounting
Determining the price of goods and services
Controlling the cost of production, distribution and sales
Classifying the costs
Fixing the production standard
Advantages of Cost Accounting
Unprofitable activities can be identified
Fixing of prices
Efficiency can be measured and improved
Price determination
Reduction of prices
Stock control
Efficiency measurement and improvement
Identification of time and resource waste
Aids Future planning
Evaluation of the reasons for losses
Cost
The monetary value which a company spends in order to produce something is referred to as cost. In business, the amount of money is expressed in terms of cost which is spent on the production of a particular product. The expenditure as incurred during the production of a particular goods or service is also termed as cost. Thus, cost can be of various types such as factory cost, prime cost, sunk cost, indirect and direct cost etc.
Cost does not include profit mark-up. If the product is sold at the same price at which it cost, then the cost price and the selling price would break even. If something like this happens it means that there is neither a profit nor a loss.
From a buyer’s point of view, the cost of the product would be known as the price of the product. The price includes both the cost of production of the product and the mark-up cost which is added by the seller in order to produce a profit.
Costing
The technique and process in which the ascertaining of the cost is involved are referred to as the costing. It can be defined as a systematic process that is used to determine the unit cost of the output product or the service which is being rendered. It is a system that helps a company to determine its cost of production. Historical costing and standard costing are some methods followed in costing. Both the types of costs fixed and variable which are incurred in the whole production process are looked upon in this type of accounting.
While variable costs are assigned to the various activities according to the performance, it is termed as direct costing. Fixed costs, when assigned to activities irrespectively, it is termed as absorption costing.
Conclusion
Knowing costing, cost accounting and cost is of utmost importance in case of understanding accounting. When costing and accounting are applied together, it is termed as cost accountancy. This is the job of a cost accountant. The appropriate practice of this ensures the growth, development and profitability of a company or any business organisation.
FAQs on Cost, Costing, and Cost Accounting: Explained
1. What are the fundamental differences between Cost, Costing, and Cost Accounting?
These three terms are related but distinct concepts in accounting.
- Cost is the monetary value or expenditure incurred to produce a specific product or service. It represents the resources consumed.
- Costing is the process or technique used to determine or ascertain the cost of a product or activity. It involves methods like standard costing or historical costing.
- Cost Accounting is a broader branch of accounting that involves recording, classifying, examining, and reporting costs to help management with decision-making, cost control, and improving profitability.
2. What are the four main types of cost accounting systems?
The four primary types of cost accounting, each serving a different purpose, are:
- Standard Cost Accounting: This method compares the actual costs incurred with pre-established standard costs to analyse variances and improve efficiency.
- Marginal Costing: It focuses on the change in total cost resulting from producing one additional unit. It clearly distinguishes between fixed and variable costs to aid in short-term decision-making.
- Activity-Based Costing (ABC): This system assigns overhead and indirect costs to products and services based on the activities they require. It provides a more accurate picture of true product costs.
- Lean Accounting: Aligned with lean manufacturing principles, this approach aims to simplify the accounting process, eliminate wasteful activities, and provide clear financial and non-financial information to support lean improvements.
3. How is 'cost' defined in business, and does it include the seller's profit?
In a business context, cost refers to the total expenditure a company incurs for the production of a particular good or service. This includes direct costs like raw materials and labour, as well as indirect costs (overheads). Crucially, the 'cost' itself does not include a profit markup. When a product is sold at its cost price, the business breaks even, meaning there is neither a profit nor a loss. The 'price' for a buyer, however, includes both the production cost and the seller's profit margin.
4. How do the purpose and audience of Cost Accounting differ from Financial Accounting?
The primary difference lies in their objective and intended users. Financial Accounting is focused on recording and reporting a company's financial transactions to create statements like the Balance Sheet and Income Statement. Its main audience is external stakeholders such as investors, creditors, and government agencies. In contrast, Cost Accounting is an internal management tool. Its purpose is to analyse cost data to help managers with planning, controlling costs, and making strategic decisions. While financial accounting is mandatory for most firms, cost accounting is primarily used by manufacturing and service companies to improve operational efficiency.
5. In what ways does cost accounting data support strategic decision-making by management?
Cost accounting provides critical data that empowers management to make informed strategic decisions. It helps in:
- Price Fixation: By accurately determining the cost of each product, management can set competitive and profitable selling prices.
- Identifying Unprofitable Activities: It highlights products, processes, or departments that are not cost-effective, allowing management to take corrective action.
- Budgeting and Future Planning: Historical cost data serves as a basis for preparing future budgets and forecasting expenses, ensuring better financial planning.
- Cost Control and Reduction: By establishing standard costs, management can identify wastage of materials, time, or other resources and implement measures to control and reduce them, thereby boosting profitability.
6. What is a 'cost unit' and why is it important in the costing process?
A cost unit is a standard or unit of quantity used to measure and express costs. It breaks down the total cost into smaller, more manageable parts related to a product or service. For example, the cost unit for a cement company could be per tonne or per bag of cement, while for a hospital, it could be per patient-day. It is important because it allows for the ascertainment of the cost per unit of output, which is essential for price setting, cost control, and performance evaluation.
7. Can you explain the conceptual difference between Marginal Costing and Activity-Based Costing (ABC)?
The key difference is how they treat and allocate costs. Marginal Costing separates all costs into two categories: fixed and variable. It is primarily concerned with the variable cost per unit (the marginal cost) and is used for decisions like accepting a special order or determining break-even points. It treats fixed costs as period costs. On the other hand, Activity-Based Costing (ABC) provides a more detailed approach by linking indirect costs (overheads) to the specific activities that drive them. For example, instead of just allocating factory rent based on machine hours, ABC might allocate it based on activities like 'machine setup' or 'quality inspection'. ABC offers a more precise product cost, especially in complex manufacturing environments, while Marginal Costing is a simpler tool for short-term, volume-based decisions.
