Based on the literatures answer the following questionNo to e.docx

Based on the literatures answer the following question:
No to exceed 600 words in total
What tool do you need to control cost in your profit center?
What is the difference between cash and revenue?
This article explains the essential concepts of cost accounting.
The overview provides an introduction to the basic cost
accounting objectives and techniques, the roles of the controller
and cost accountant within the corporate management structure
and the ethical considerations that guide cost accountants. This
article also explains the basic cost accumulation methods that
are used in cost accounting systems. These methods include job
order costing, process costing, backflush costing, hybrid costing
and joint and by-product costing. Further, explanations of the
most common costs that companies must plan for and control
are included, such as direct labor, direct material and factory
overhead costs. Finally, this overview describes how cost
accounting techniques affect business considerations in areas
such as budgeting, pricing and inventory costing methods,
which include throughput, direct, absorption and activity-based
costing systems.
Keywords Activity-Based Costing; Activity-based Management
(ABM); Actual Cost System; Backflush Costing; Balance Sheet;
By-product; Controller; Cost Accounting; Cost Accumulation;

Cost Driver; Direct Labor; Direct Materials; Factory Cost;
Factory Overhead; Fixed Cost; Indirect Cost; Job Order
Costing; Joint Cost; Labor Productivity; Process Costing; Sunk
Cost; Variable Cost
Accounting > Cost Accounting
Overview
Cost accounting is the application of accounting and costing
principles to the tracking, recording and analysis of the costs
associated with the products or services a business produces and
the activities involved in the production process. Broadly
speaking, cost accounting objectives include the preparation of
statistical data, application of cost accumulation and cost
control methods to production processes and analysis of an
organization's profitability as compared with previous periods
of time and projected budgets. Cost accountants use basic
accounting techniques to compile and analyze data to meet these
objectives. In performing these tasks, cost accountants work
within the controller's office or the accounting department of
most companies. And in addition to any internal company
policies that govern their duties, cost accountants must consider
the ethical principles that guide the accounting and financial
reporting industries. The following sections provide a more in-
depth explanation of these concepts.
Introduction to Cost Accounting
Cost accounting identifies, defines, measures, reports and
analyzes the various elements of direct and indirect costs
associated with producing and marketing goods and services.
Cost accounting also measures performance, product quality and
productivity. Direct costs can be directly traced to producing
specific goods or services, such as the cost of raw materials
used in the production of a final consumer good. Indirect costs
are expenditures on labor, materials or services that cannot be
economically identified with a specific saleable cost unit.
Indirect costs include salaries for employees and rental or lease

payments for office or factory space.
Cost Accounting Objectives & Techniques
The main objective of cost accounting is to compile, analyze
and transmit both financial and non-financial information to
management for planning, controlling and operational
evaluation purposes. At its most basic, cost accounting
measures the economic sacrifice an organization makes to
achieve its goals. Costs are generally categorized by
expenditure type. For instance, product costs represent the
monetary measurement of resources an organization uses, such
as material, labor and overhead. Service costs are the monetary
sacrifices it makes to provide the goods or services. Cost
accounting tracks these costs and provides this information to
management so that the management team can make more
informed business and administrative decisions. For this reason,
modern cost accounting often is called management accounting
because managers use accounting data to guide their decisions.
In addition, managers oversee and distribute resources to most
efficiently meet an organization's goals. Managers use the
information produced by cost accounting techniques to direct
day-to-day operations and supply feedback to evaluate and
control performance.
Data Compilation & Analysis
To compile data for management, cost accountants obtain cost
information on product and service costs from a variety of
sources. For instance, they may use vendor invoices,
engineering studies of production processes, employee
timesheets and planning schedules from production supervisors.
Once they have compiled sufficient records, cost accountants
use various means of analyzing the data, depending on the
results they are seeking to obtain. Cost analysis techniques
include: Break-even analysis, comparative cost analysis, capital
expenditure analysis and budgeting techniques.
· The break-even point for a product is the point at which the

total revenue generated equals the total costs associated with
the production and sale of a given product.
· Break-even analysis is the study of when it is profitable for a
business to introduce a new product as opposed to modifying an
existing product so that it becomes more lucrative.
· Comparative cost analysis involves identifying the costs
associated with the baseline materials and processes and any
available alternatives, and calculating the comparative costs
between them.
· Capital expenditure analysis involves reviewing the funds
spent for the acquisition of long-term assets.
Interpretation
After performing their analyses, cost accountants then use their
professional judgment to interpret the results of each costing
technique as they apply to different aspects of a company's
financial analysis. For example, although breakeven analysis
indicates the capacity at which operations become profitable, it
assumes a static condition in which sales prices and expenses
are constant. However, such factors do not remain constant in
the real world. Inflation, supply, and demand cause sales prices
and expenses to vary. Cost accountants therefore work with
many people in other departments of a company (such as
marketing, engineering, manufacturing, financial accounting
and human resources personnel) to obtain current information
that may account for some of these fluctuations.
Finally, cost accountants collect all costs involved in the
process of making goods or providing services and use such cost
data for income measurement and inventory valuation. This
information also helps management plan and make operational
decisions. Because of these responsibilities, cost accountants
must exercise initiative and good judgment and meet high
ethical standards. Further, cost accountants must provide
management with information that may indicate adverse
economic conditions when these situations arise, such as reports
about poor product quality, cost overruns or abuses of company

policies.
Roles of Controllers & Cost Accountants
A controller is the title that is often given to a company's chief
accounting officer or manager of the accounting department. A
controller plays a significant role in planning and guiding a
company's financial decisions and is often charged with the
tasks of designing systems to prepare internal reports for
management and external reports for public and government
users. A cost accountant is a member of the controller's
department and is responsible for collecting product costs and
preparing accurate and timely reports to evaluate and control
company operations. As such, cost accountants assemble,
classify and summarize financial and economic data on the
production and pricing of goods or services.
In addition, cost accountants play an important role in
coordinating external and internal data so managers can
formulate better planning and control activities. In the planning
phases, cost accountants help management by preparing budgets
that provide cost estimates of material, labor and technology. A
company uses this data to review alternative courses of action
and to select the best methods of achieving its goals and profit
objectives. Cost accounting data are used for both planning and
control activities. These activities differ in that planning
activities are focused on future goals while control activities
involve monitoring present production processes and tracking
any variations from estimated budgets and plans. Cost
accountants monitor these activities and issue progress reports
that summarize the costs of these activities and the efficiency of
the processes associated with them. By comparing actual results
with the forecasted budget amounts, cost accountants are able to
identify areas of deviation where problems may be developing.
Cost accountants also compile and relay this information to

management so that appropriate decisions can be made to shore
up inefficient or failing processes within an organization.
Ethical Considerations Facing Cost Accountants
There are several types of ethical problems that cost
accountants may face. One of the major ethical issues that a
cost accountant must consider is confidentiality. This issue is
particularly important because cost accountants typically have
detailed access to sensitive information, such as payroll records,
product costs and individual product or departmental profits.
Cost accountants must carefully safeguard such information
because if improperly disclosed, it could be improperly used by
other entities or even by hostile personnel within an
organization.
Another issue that cost accountants face is integrity,
particularly when faced with difficult tasks that may surpass
their training or level of experience. This is critical because the
reports and analyses that cost accountants generate become the
foundation upon which management teams stake critical
decisions, and thus it is imperative that the information
contained in these materials be complete and accurate. Finally,
cost accountants must maintain the ability to view information
and strategies objectively. Objectivity allows a cost accountant
to present cost analyses in a fair, well-balanced format that
discloses all relevant information pertaining to a decision. Cost
accountants may face considerable pressure from managers
whose operations are being reviewed to skew reported
information in such a way as to make the departments or
products they oversee appear to be in better financial standing
than they actually are. Thus, ethical considerations such as
confidentiality, integrity and objectivity are an important part
of the responsibilities that cost accountants face and their
observance, or lack thereof, can have a significant impact on a
company's future.

Cost Accumulation
One of the most important tasks that cost accountants must
accomplish is to gather or accumulate cost information and then
assign that information to appropriate products or orders or
other processes using a cost management system. The most
commonly used costing methods are job order costing and
process costing. However, many companies also use joint
product or by-product costing or a hybrid costing system. The
nature of the activities being analyzed determines which cost
management system is most appropriate. The following sections
describe these systems in more detail.
Job Order Costing
Job order costing is the typical method for compiling cost
accounting information into a usable format. In job order
costing systems, costs are assigned to each job, which may be
an order, a contract, a unit of production or a batch that is
processed according to customer specifications. Thus, job order
costing is appropriate for manufacturing and service industries
such as design or publishing companies, manufacturing
companies that produce special order products, accounting firms
that perform audits or any organization producing a tailor-made
good or service according to customers’ specific requirements.
For example, a graphic design company would likely use job
order costing because graphic designers usually produce each
design order to a specific customer request. Thus, job costing
links all material and direct labor costs directly to a job or batch
and all direct and overhead costs associated with that job or
batch are accumulated for closer analysis (Bragg, 2005).
One of the major benefits of job costing is that a company’s
management team can easily determine all of the various costs
being generated for each job being completed. This information
allows management to examine each cost to determine why it
was necessary and how it can be managed better in the future,
thereby contributing to greater levels of profitability in the

future. Another reason that companies use job costing is that
they can more closely track the costs for each job as it is being
fulfilled. Accounting software available today allows companies
to use a job costing system to track costs as they arise rather
than waiting until the job is complete to compile and assess
overall costs. This is advantageous in that a company can
oversee the costs incurred for more complex jobs during the
production process so that there is sufficient time to make
changes to the production process or sales price before the jobs
close, based on the costing information provided by the job
costing system (Bragg, 2005).
However, there are also considerable problems associated with
job costing. An initial problem is that it concentrates attention
on the costs incurred by specific products rather than on costs
associated with different departments or activities. Another
difficulty is that job costing is not always relevant. For
example, some software manufacturers have high development
costs but little direct costs associated with the marketing or
advertising of its products. Finally, job costing requires a
significant amount of data entry and data accuracy for the
analysis to tender significant results. Minute data related to
materials, labor, overhead, indirect labor, scrap, spoilage and
supplies must be entered into a system that can accurately
assign these costs to their corresponding jobs. This process is
open to errors stemming from keying errors or the
misidentification of jobs or customers (Bragg, 2005).
Process Costing
Process costing is used in many industries where there are such
large quantities of similar products that it makes no sense to
track the cost of individual or small batches of products.
Instead, costs are averaged over large quantities of production,
which yields the same unit costs for all items in a production

run. This type of costing requires accounting calculations that
are considerably different from those used for job costing.
Using a process costing system, accountants accumulate costs
for each department for a time period and allocate these costs
among all the products manufactured during that period.
Companies that mass produce similar goods such as chemicals,
bakery goods, or canned food in a continuous production
process use process accounting. Direct material, direct labor
and factory overhead costs are accumulated for each department
for a set period of time; usually a month. At the end of the
period, departmental cost is divided by the number of units
produced to obtain a cost per unit.
For instance, one type of process costing is known as first-in
first-out ("FIFO") costing. This involves a complex calculation
that creates layers of costs, one for units of production started
in the previous production period but not completed, and
another layer for production started for the current period. This
type of costing is used when there are ongoing, significant
changes in product costs from period to period-to such an extent
that management needs to know the new costing levels so that it
can reprice products appropriately, determine if there are
internal costing problems requiring resolution or even replace
managers or restructure their compensation or bonus packages.
Backflush Costing
Backflush costing is a simplified cost accumulation method that
is sometimes used by companies that adopt just-in-time ("JIT")
production systems. The JIT system is an approach that aims to
reduce costs through the elimination of inventory. All materials
and components are designed to arrive at a work station exactly
when they are needed. Similarly, products are aimed to be
completed and available to customers just when the customers
want them.
In a backflush cost system, costing is deferred until products
are completed. Standard costs are then run backwards through

the system to determine which costs are associated with which
products. The result is that time consuming meticulous tracking
of costs is eliminated. The system is beneficial for companies
that keep small inventories because costs are directly linked to
the cost of products sold and manufacturing costs accrue in
fewer inventory accounts than when using other methods. In
extreme backflush systems, most accounting records are no
longer needed because a higher percentage of the manufacturing
costs become direct product costs and thus fewer cost
allotments are necessary. However, the drawback to the JIT
principle is that although the eradication of inventory stockpile
eliminates storage and carrying costs, it also eliminates the
cushion against production errors and imbalances that
inventories provide.
Joint Product & By-Product Costing
Many industrial companies are faced with the difficult problem
of assigning costs to their by-products and joint products.
Chemical companies, petroleum refineries, flour mills, coal
mines, meat packers and other similar producers' process, and
sometimes create products to which some costs must be
assigned, particularly for use in the preparation of financial
statements.
Joint products are two or more products that are produced
simultaneously by a common process or series of processes,
with each product possessing a more than nominal value in the
form in which it is produced. Pricing for joint products is
somewhat more complex than pricing for a single product as
fluctuations in demand may create a higher demand, and thus a
higher price, for one product over another. A joint cost can be
defined as the cost that arises from the simultaneous processing
or manufacturing of products produced from the same process.
Joint costs may be allocated to the joint products based on a
physical measurement such as volume or weight, or they may be
allocated to the joint products according to their relative sales
value once they emerge as individually identifiable products.

By-products are products with a comparatively low total value
that are produced concurrently with a product with a greater
total value. The product with the greater value, commonly
called the main product, is usually produced in greater
quantities than the by-products. Thus, a by-product is an
additional product that arises from a production process but
with a potential sales value that is much smaller than that of the
main product or joint products that were produced from the
same process.
The split-off point is defined as the point at which joint
products emerge as individual units. Before the split-off point,
the cost of the products is almost inseparable and is often
attributed to the process itself rather than the individual
products. However, generally accepted accounting principles
require that costs be assigned to products for inventory
valuation purposes. Though costs incurred by a production
process up to the split-off point cannot be clearly assigned to a
single product, it is still necessary to find some reasonable
allocation method for doing so in order to comply with standard
accounting rules. By-product and joint product costing methods
enable cost accountants to assign costs as accurately as possible
while also furnishing management with data that can be useful
in planning and managing various types of costs and in
evaluating the actual profit performance of individual products
and manufacturing processes.
Hybrid Costing
Hybrid or mixed costing systems are used when multiple cost
accumulation methods are required. For example, some
companies may use process costing to track direct materials and
job order costing for such costs as direct labor and factory
overhead. Other companies may use job order costing for direct
materials and process costing for direct labor and overhead
costs. Further, different departments or areas of focus within a
company might need to use different cost accumulation

methods. This is why hybrid or mixed cost accumulation
methods are sometimes used so that the most effective cost
accumulation system for each activity is used to record, track
and analyze costs.
Cost Management
Effective cost management is essential for businesses in order
for them to provide the best price and service to customers,
streamline production processes and control their investment in
inventories. In addition, businesses need systems to track and
control costs involving direct materials, direct labor and factory
overhead expenses. These costs are fundamental to almost every
business and comprise a significant portion of the costs
associated with the production of goods and services. The
following sections explain these basic costs in more detail.
Direct Material
Direct material is any raw material that becomes an identifiable
part of the finished product. For example, in manufacturing
women's clothing, the fabric is direct material. Accountants
separately record and trace all direct material required in
manufacturing to specific products. Companies buy direct
materials in various forms. They buy some direct material in a
finished state and assemble the component parts into their final
product. Manufacturers of consumer electronic goods often
purchase electronic components that workers assemble into
finished appliances. Other companies purchase direct material
in a raw state and apply labor, machinery and equipment to
change it into another form. Bakeries, for instance, obtain basic
ingredients that are combined and baked in order to create a

finished product.
The acquisition, control and storage of direct materials requires
different costing processes. To purchase direct materials,
companies use purchase requisitions and purchase orders. When
the materials are received, the receiving department inspects the
items for quantity and quality and to ensure that all items have
arrived. Materials must then be stored in a safe, secure and
environmentally stable area until they are used. Finally,
inventories must be continually monitored to ensure the steady
flow of sufficient materials.
Labor
Direct labor costs are the wages earned by workers who
transform direct materials from their raw state to a finished
product. For example, the wages paid to factory workers who
assemble parts and monitor the machinery are direct labor costs.
However, only the wages earned by those workers involved in
the physical manufacture of products are direct labor costs.
Thus, labor costs consist of basic pay and fringe benefits. The
basic pay for work performed is called the base rate. An
equitable base rate or salary structure requires an analysis,
description and evaluation of each job within a plant or office.
Fringe benefits also form a substantial element of labor costs.
Fringe benefits include the employer's share of FICA tax,
unemployment taxes, holiday pay, vacation pay, overtime
premium pay, insurance benefits and pension costs. Fringe
benefits must be added to the base rate to arrive at the full labor
cost.
Factory Overhead
Factory overhead consists of all the costs that are incurred in
production (not marketing and administration) and not traced
directly to jobs. For example, the commissions earned by sales
or product representatives are generally marketing expenses

while salaries earned by top management are often classified as
administrative expenses. However, the wages earned by a line
manager in charge of overseeing production clerks are generally
factory overhead costs. In addition, factory overhead includes
indirect materials, which are the operating, repair and janitorial
supplies used in the factory. Also, factory overhead includes
such costs as rent, taxes, insurance and depreciation on
manufacturing facilities, as well as occupancy costs such as the
light, heat and power used to run the manufacturing facility.
Applications
Cost Accounting in Business Considerations
Cost accounting plays an important role in the growth and
development of a business organization. As businesses grow,
their management teams set goals and objectives for future
development benchmarks and then create and implement plans
for achieving these aspirations. These plans developed by
management are evaluated and tracked through the budgeting
and accounting processes. In particular, cost accounting
provides management with detailed statements of the actual cost
of materials, labor, factory overhead, marketing expenses and
administrative expenses incurred in the development of the
business. By analyzing and comparing a company's actual costs
with those budgeted for specific time periods or processes,
management is able to identify areas of both strength and
weakness in a company. This knowledge enables management to
make clearer and more informed decisions about a company's
operations. In particular, by identifying significant deviations
from a company's budget, a management team can develop and
implement appropriate corrective action that is tailor made for
any situation. Some of the steps that a management team may
take are to redesign a more suitable budget, restructure product
pricings and monitor inventory flow and valuation. The
following sections describe these processes in more detail.

Budgeting
A budget is an estimation of the revenue and expenses an
organization will incur over a specified future period of time.
Beyond its financial component, budgeting provides a way for
an organization to develop an informed plan of action to attain
future objectives based on relevant indicators of past
performance and expenses. This plan of action can then be
communicated to key personnel and decision makers within an
organization so that the entire management team is clear on the
growth objectives of the organization. Without the discipline
and framework a budget provides, individual managers may take
actions that are in their best interest, but not ideal for the
company as a whole.
During the budget-making process, cost accounting plays a
critical role in helping to shape some or all of the key figures.
Cost accountants may develop the entire budget, or may be
assigned a partial role in developing a master budget. For
instance, cost accountants may calculate overhead rates for the
valuation of projected inventory levels, calculate unit or
individual product costs during a production process or evaluate
the overall cost of producing each item in the company's sales
budget. Cost accounting also helps a company's management
establish target costs for new products that are in the
development stage and construct budgets for future time periods
or significant investments. For instance, cost accountants may
assist in developing a budget for capital expenditures. Capital
expenditures are funds used by a company to acquire or upgrade
physical assets such as property, industrial buildings or
equipment. Thus, because capital expenditures tie up significant
resources of a company for an extended period of time, these
acquisitions are considered more risky than short-term
investments and much thought and planning goes into the
evaluation of their acquisition.

Thus, the budget process is a critical component of the overall
plan by which a company allocates its resources. Budgeting
enables a company to channel funds to the most profitable
activities while tracking and controlling expenditures in other,
perhaps less profitable departments. This process enables a
company to capture the information it needs to achieve its
operational and financial objectives. Cost accounting plays an
important role in assisting a company's management by
providing key data on unit and production costs, capital
expenditures, target costs and departmental expenses that are
central components of the budgeting process.
Pricing Issues
Some products — for instance such commodities as oil, wheat,
corn or gold — are priced based upon forces in the market.
However, most of the time companies set and alter the prices
they charge for their products. In establishing price points for a
product, a company's management works closely with its cost
accountants to determine a fair price for each product that is
low enough so that the product is competitive in the market, but
high enough so that the company is able to make a profit from
its sales. Cost accounting also plays an important role in
helping companies to set pricing levels for both short-range and
long-range pricing objectives. Short-range pricing scenarios
occur when a company receives a special request from a
customer to order products at a low or below-market price.
When this occurs, the customer may be pitting one of its
suppliers against another in an attempt to purchase goods at the
lowest price, or it may desire to place a large order and is
seeking to buy items in bulk at a lower price. When this occurs,
the company must determine whether it will honor the request.
In order to determine whether a short-range pricing scenario is
feasible for a company, the cost accountant will likely be asked
to perform several types of analyses so that management has the
information necessary to make a final decision. The basic rule
for short-range pricing is that the lowest price that a company

can charge for a product is one that at least covers all variable
costs of production, plus a small profit. Anything lower would
cost company money to produce the product and therefore
would not be an economically sound price point for a company.
To complete these calculations, cost accountants must weigh the
variable costs that are included in their analysis, which could
include direct labor costs, direct machine costs, inventory
carrying costs, raw materials, quality costs and scrap costs.
Once these costs have been calculated, the cost accountant can
provide management with the minimum price that must be
charged in order for a company to cover its expenditures and
recoup at least some profit.
Another form of pricing that company must consider is long-
range pricing, which is a common method for pricing sales of
products sold in bulk. Long-range pricing factors several forms
of overhead costs into the final price of products, including
product-specific overhead costs, batch-specific overhead costs,
product line-specific overhead costs and facility-specific
overhead costs.
· Product-specific overhead costs include the expenses incurred
in the production process of a single unit of a product.
· Batch-specific overhead costs include the cost of labor
required to set up or break down a machine for a production
process, such as the utility cost of running the machines
throughout the production process, the cost of transporting
component parts to the production area and finished products
from the production area to a shipping area and the depreciation
on all machinery used in the production process.
· Product line-specific overhead costs include the cost of
maintaining a production manager, design team, quality control
personnel, customer service representatives and distribution and
advertising staff to monitor the production of a product line and
promote its sales.
· Finally, facility-specific overhead costs include the costs of
building depreciation on the production facility, and the taxes,

insurance and maintenance costs involved in running the site.
All of these costs must be factored into the calculations of a
final sales price for each product. Long-range pricing is
difficult in that it can be challenging for cost accountants to
accurately predict all of the overhead costs that will be incurred
in the production and promotion of an individual product. Thus,
pricing is an extremely complex area of budget development,
and cost accountants must often work closely with the
marketing and business development departments to develop
appropriate short-range and long-range pricing strategies. In
addition, cost accountants must be mindful of federal laws that
prevent collusive or predatory pricing, and must ensure that all
pricing policies stay within the guidelines set by these laws.
Inventory Costing Methods
Cost accountants use different methods to track and analyze the
costs associated with obtaining, storing and restocking
inventories. Traditionally, the most common inventory costing
methods used by cost accountants were throughput or direct
costing systems. However, many cost accountants have begun to
use activity-based costing methods because of the holistic
perspective this method affords of the entire production process.
The following sections explain these inventory costing methods
in greater detail.
Throughput Costing
The throughput method involves tracking the least amount of
cost to the inventory. Using this method, only direct material
costs are charged to the inventory. All other costs are expensed
during the period. The throughput method does not provide
proper matching, whereby expenses are recognized in the same
reporting period as the related revenues for purposes of
generally accepted accounting principles, except when direct
materials are expensed at the time they are incurred rather than

being capitalized in inventory costs. Therefore, the throughput
method is not sufficient for external reporting in audits for
public use, although it provides many advantages for internal
reporting for management purposes (Martin, n.d.).
Direct Costing
In direct costing, more of the cost is traced than in the
throughput method, but less than with the absorption method. In
direct costing only the changeable manufacturing costs are
charged to the inventory. Fixed manufacturing costs flow into
expenses in the period during which they are acquired. This
method has both advantages and disadvantages in regards to
internal reporting. It does not allow proper matching for
purposes of generally accepted accounting principles because
the current fixed costs that accompany producing the inventory
are charged to expense costs regardless of whether or not the
output is sold during the designated time period. For this
reason, direct costing is not useful for external reporting
(Martin, n.d.).
Absorption Costing
Absorption costing is a traditional method where all
manufacturing costs are capitalized or charged to the inventory,
thereby becoming assets. Therefore these costs do not become
expenses until the inventory is sold. In this way, matching is
more closely estimated, although sales and administrative costs
are charged to expense costs. Absorption costing is necessary
for external reporting, and is also frequently used for internal
reporting.
Activity-based Costing
Activity-based costing ("ABC") is a relatively new costing
method that defines production processes, identifies costs
associated with those processes, determines the unit costs of
products and services, and create reports that assign the costs of
resources to specific activities as a way of measuring the

expenditures and profitability involved in specific processes.
ABC is considered a more accurate cost management system
than traditional costing systems because it enables managers to
improve business process effectiveness and efficiency by
determining the "true" costs involved in the production of a
product or service.
ABC differs from traditional costing measures in several
significant ways. First, traditional systems allocate costs to
products using such allocation bases as units, direct labor input,
machine hours and revenue dollars. ABC systems allocate costs
to products and services using allocation bases that correspond
to cost drivers, or the factors that have the greatest effect upon
activity costs, such as number of machine setups, run times or
special inspection requirements. Also, because of the inability
of traditional costing methods to align allocation bases with
cost drivers, these methods can lead to overcosting and
undercosting problems. ABC methods enable cost accountants
to associate allocation bases with cost drivers, which provide
managers with the most accurate information to support their
decisions. Finally, ABC methods summarize the costs of
organizational, or multi-department, activities while traditional
costing techniques generally focus on the costs incurred in
single departments.
Conclusion
Cost accounting is an important means by which businesses may
compile, track, record and analyze all aspects of the costs
associated with producing, marketing and selling goods and
services. Cost accounting includes cost accumulation methods
that enable cost accountants to compile the most accurate
information about production processes, such as job order
costing, process costing, backflush costing, hybrid costing and
joint and by-product costing systems. Cost accounting also
involves helping an organization's management to monitor and
contain ongoing expenditures, which include direct labor, direct
material and factory overhead costs. To properly manage
business operations, managers rely on the records and analyses

prepared by cost accountants to create budgets, set prices and
control inventories. Thus, cost accountants play a critical role
in the life cycle and development of individual products,
product lines and even businesses themselves.
Terms & Concepts
Activity-based costing (ABC): A system in which multiple
overhead cost pools are allocated using bases that include one
or more non-volume-related factors.
Activity-based Management (ABM): Detailed analysis of
activities and the expenses created by those activities (used as a
basis for controlling and improving efficiency) or the use of
information obtained from activity-based costing to make
improvements in a firm.
Actual Cost System: A method of collecting cost information as
cost is incurred.
Backflush Costing: A method of cost accumulation that works
backward through the available accounting information after
production is complete. This is useful in settings in which
processing speeds are extremely fast.
Balance Sheet: A financial statement showing financial position
(assets, liabilities and owners equity at the end of a period. The
balance sheet complements the income statement.
By-product: By-products are products with a comparatively low
total value that are produced concurrently with a product with a
greater total value.
Cost Accounting: Calculation of costs for the purpose of
planning and controlling activities, improving quality and
efficiency and making decisions. Also referred to as
management accounting.
Direct Labor: Labor that converts direct materials into the
finished product and can be assigned feasibly to a specific
product.
Direct Materials: Materials that form an integral part of the
finished product and that are included explicitly in calculating
the cost of the product.
Factory Cost: Usually, the sum of three cost elements: Direct

materials, direct labor and factory overhead.
Factory Overhead: Indirect materials, indirect labor and all
other factory costs that cannot be conveniently identified with
specific jobs, products or final cost objectives.
Job Order Costing: A costing method in which costs are
accumulated for each job, batch, lot or customer order.
Joint Cost: The cost that arises from the simultaneous
processing or manufacturing of products produced from the
same process.
Labor Productivity: The measurement of production
performance using the expenditure of human effort as a
yardstick; the amount of goods or services a worker produces.
Process Costing: A method in which materials, labor and factory
overhead are charged to cost centers. The cost assigned to each
unit of product manufactured is determined by dividing the total
cost charged to the cost center by the number of units produced.
Sunk Cost: An expenditure that has already been made and
cannot be recovered.
Variable Cost: A cost that increases in total proportionately
with an increase in activity and decreases proportionately with a
decrease in activity.

Based on the literatures answer the following questionNo to e.docx

Recommandé

Recommandé

Contenu connexe

Similaire à Based on the literatures answer the following questionNo to e.docx

Similaire à Based on the literatures answer the following questionNo to e.docx (20)

Plus de ikirkton

Plus de ikirkton (20)

Dernier

Dernier (20)

Based on the literatures answer the following questionNo to e.docx