Answer / sonali

There are various types of cost accounting eg: Contract
costing, marginal costing, etc

How costing helps in manegerial decision making?
It helps the business to know its BEP (Break even point)
i.e. helps the business knowing the minimum output required
to cary on the businees / to earn the profits.

Answer / belaynesh legesse

Managers use
cost accounting to support decision making to reduce a
company's costs and improve its profitability.

Answer / ghulam mujtaba

Cost accounting
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In management accounting, cost accounting is the process of
tracking, recording and analyzing costs associated with the
products or activities of an organization. Managers use
cost accounting to support decision making to reduce a
company's costs and improve its profitability. As a form of
management accounting, cost accounting need not follow
standards such as GAAP, because its primary use is for
internal managers, rather than external auditors, and what
to compute is instead decided pragmatically.

Costs are measured in units of nominal currency by
convention. Cost accounting can be viewed as translating
the Supply Chain (the series of events in the production
process that, in concert, result in a product) into
financial values.

There are at least four approaches:

Standardized Cost Accounting
Activity-based Costing
Throughput Accounting
Marginal Costing / Cost-Volume-Profit Analysis
Classical Cost Elements are:

Raw Materials
Labor
Indirect Expenses / Overhead
Contents [hide]
1 Origins
2 Standard Cost Accounting
2.1 Weaknesses of Standard Cost Accounting for Management
Decision Making
2.2 The Development of Throughput Accounting
3 Activity-based costing
4 Marginal Costing
5 See also



[edit] Origins
Cost accounting has long been used to help managers
understand the costs of running a business. Modern cost
accounting originated during the industrial revolution,
when the complexities of running a large scale business led
to the development of systems for recording and tracking
costs to help business owners and managers make decisions.

In the early industrial age, most of the costs incurred by
a business were what modern accountants call "variable
costs" because they varied directly with the amount of
production. Money was spent on labor, raw materials, power
to run a factory, etc. in direct proportion to production.
Managers could simply total the variable costs for a
product and use this as a rough guide for decision-making
processes.

Some costs tend to remain the same even during busy
periods, unlike variable costs which rise and fall with
volume of work. Over time, the importance of these "fixed
costs" has become more important to managers. Examples of
fixed costs include the depreciation of plant and
equipment, and the cost of departments such as maintenance,
tooling, production control, purchasing, quality control,
storage and handling, plant supervision and engineering. In
the early twentieth century, these costs were of little
importance to most businesses. However, in the twenty-first
century, these costs are often more important than the
variable cost of a product, and allocating them to a broad
range of products can lead to bad decision making. Managers
must understand fixed costs in order to make decisions
about products and pricing.

For example: A company produced railway coaches and had
only one product. To make each coach, the company needed to
purchase $60 of raw materials and components, and pay 6
laborers $40 each. Therefore, total variable cost for each
coach was $300. Knowing that making a coach required
spending $300, managers knew they couldn't sell below that
price without losing money on each coach. Any price above
$300 became a contribution to the fixed costs of the
company. If the fixed costs were, say, $1000 per month for
rent, insurance and owner's salary, the company could
therefore sell 5 coaches per month for a total of $3000
(priced at $600 each), or 10 coaches for a total of $4500
(priced at $450 each), and make a profit of $500 in both
cases.


[edit] Standard Cost Accounting
In modern cost accounting, the concept of recording
historical costs was taken further, by allocating the
company's fixed costs over a given period of time to the
items produced during that period, and recording the result
as the total cost of production. This allowed the full cost
of products that were not sold in the period they were
produced to be recorded in inventory using a variety of
complex accounting methods, which was consistent with the
principles of GAAP. It also essentially enabled managers to
ignore the fixed costs, and look at the results of each
period in relation to the "standard cost" for any given
product.

For example: if the railway coach company normally produced
40 coaches per month, and the fixed costs were still
$1000/month, then each coach could be said to incur an
overhead of $25 ($1000/40). Adding this to the variable
costs of $300 per coach produced a full cost of $325 per
coach.
This method tended to slightly distort the resulting unit
cost, but in mass-production industries that made one
product line, and where the fixed costs were relatively
low, the distortion was very minor.

For example: if the railway coach company made 100 coaches
one month, then the unit cost would become $310 per coach
($300 + ($1000/100)). If the next month the company made 50
coaches, then the unit cost = $320 per coach ($300 +
($1000/50)), a relatively minor difference.
An important part of standard cost accounting is a variance
analysis which breaks down the variation between actual
cost and standard costs into various components (volume
variation, material cost variation, labor cost variation,
etc.) so managers can understand why costs were different
from what was planned and take appropriate action to
correct the situation.


[edit] Weaknesses of Standard Cost Accounting for
Management Decision Making
As time went on, standard cost accounting lost its
usefulness for management decision making due to a variety
of reasons:

The practice of paying workers on a 'set-piece' basis
changed in favour of paying on an hourly rate.
Modern companies tend to have relatively low truly variable
costs (primarily raw material, commissions or casual
workers) and very high fixed costs (worker salaries,
engineering costs, quality control, etc.).
Equipment has become more complex and specialized and may
be a very significant proportion of total costs.
Changes in the level of full cost inventory create swings
in profitability that are difficult to explain or
understand. An increase in inventory can "absorb" costs of
production and increase profits, while a decrease in
inventory level will decrease profits.
Organizations with a wide range of products or services
have processes which are common to several finished items,
making cost allocation irrelevant or misleading.
As a result of the above, using standard cost accounting to
analyze management decisions can distort the unit cost
figures in ways that can lead managers to make decisions
that do not reduce costs or maximize profits. For this
reason, managers often use the terms "direct costs"
and "indirect costs" to replace the standard costing, to
better reflect the way allocation of overhead is actually
calculated. Indirect costs (often large) are usually
allocated in proportion to either labor cost, other direct
costs, or some physical resource utilization.

For example: If the railway coach company now paid its
workforce a fixed monthly rate of $8,000 (total) and its
other fixed costs had risen to $2,600/month, the total
fixed costs would then be $10,600/month. The unit cost to
make 40 coaches per month would still be $325 per coach
($60 material + ($10,600/40)), but producing 100 coaches
would result in a unit cost of $166 per coach ($60 + ($10,
600/100)), provided the company had the capacity to
increase production to that level.
Managers using the standard cost for 40 coaches per month
would likely reject an order for 100 coaches (to be
produced in one month) if the selling price was only $300
per unit, seeing that it would result in a loss of $25 per
unit. If they analyzed the fixed vs. variable cost
distinction, they would see clearly that filling this order
would result in a contribution to fixed costs of $240 per
coach ($300 selling price less $60 materials) and would
result in a net profit for the month of $13,400 (($240 x
100) - 10,600).


[edit] The Development of Throughput Accounting
Main article: Throughput accounting
As business became more complex and began producing a
greater variety of products, the use of cost accounting to
make decisions to maximize profitability came under
question. Management circles became increasingly aware of
the Theory of Constraints in the 1980s, and began to
understand that "every production process has a limiting
factor" somewhere in the chain of production. As business
management learned to identify the constraints, they
increasingly adopted throughput accounting to manage them
and "maximize the throughput dollars" (or other currency)
from each unit of constrained resource.

For example: The railway coach company was offered a
contract to make 15 open-topped streetcars each month,
using a design which included ornate brass foundry work,
but very little of the metalwork needed to produce a
covered rail coach. The buyer offered to pay $280 per
streetcar. The company had a firm order for 40 rail coaches
each month for $350 per unit.
The company accountant determined that the cost of
operating the foundry vs. the metalwork shop each month was
as follows:
Overhead Cost by Department Total Cost Hours Available per
month Cost per hour
Foundry $ 7,300.00 160 $45.63
Metal shop $ 3,300.00 160 $20.63
Total $10,600.00 320 $33.13

The company was at full capacity making 40 rail coaches
each month. And since the foundry was expensive to operate,
and purchasing brass as a raw material for the streatcars
was expensive, the accountant determined that the company
would lose money on any streetcars it built. He showed an
analysis of the estimated product costs based on standard
cost accounting and recommended that the company decline to
build any streetcars.
Standard Cost Accounting Analysis Streetcars Rail coach
Monthly Demand 15 40
Price $280 $350
Foundry Time (hrs) 3.0 2.0
Metalwork Time (hrs) 1.5 4.0
Total Time 4.5 6.0
Foundry Cost $136.88 $ 91.25
Metalwork Cost $ 30.94 $ 82.50
Raw Material Cost $120.00 $ 60.00
Total Cost $287.81 $233.75
Profit per Unit $ (7.81) $116.25

However, the company's operations manager knew that recent
investment in automated foundry equipment had created idle
time for workers in that department. The constraint on
production of the railcoaches was the metalwork shop. She
made an analysis of profit and loss if the company took the
contract using throughput accounting to determine the
profitability of products by calculating "throughput"
(revenue less variable cost) in the metal shop.
Throughput Cost Accounting Analysis Decline Contract Take
Contract
Coaches Produced 40 34
Streetcars Produced 0 15
Foundry Hours 80 113
Metal shop Hours 160 159
Coach Revenue $14,000 $11,900
Streetcar Revenue $ 0 $ 4,200
Coach Raw Material Cost $(2,400) $(2,040)
Streetcar Raw Material Cost $ 0 $(1,800)
Throughput Value $11,600 $12,260
Overhead Expense $(10,600) $(10,600)
Profit $1,000 $1,660

After the presentations from the company accountant and the
operations manager, the president understood that the metal
shop capacity was limiting the company's profitability. The
company could make only 40 rail coaches per month. But by
taking the contract for the streetcars, the company could
make nearly all the railway coaches ordered, and also meet
all the demand for streetcars. The result would increase
throughput in the metal shop from $6.25 to $10.38 per hour
of available time, and increase profitability by 66
percent.

[edit] Activity-based costing
Main article: Activity-based costing
Activity-based costing (ABC) is a system for assigning
costs to products based on the activities they require. In
this case, activities are those regular actions performed
inside a company. "Talking with customer regarding invoice
questions" is an example of an activity performed inside
most companies.

Accountants assign 100% of each employee's time to the
different activities performed inside a company (many will
use surveys to have the workers themselves assign their
time to the different activities). The accountant then can
determine the total cost spent on each activity by summing
up the percentage of each worker's salary spent on that
activity.

A company can use the resulting activity cost data to
determine where to focus their operational improvement
efforts. For example, a job based manufacturer may find
that a high percentage of their workers are spending their
time trying to figure out a hastily written customer order.
Via ABC, the accountants now have a currency amount that
will be associated with the activity of "Researching
Customer Work Order Specifications". Senior management can
now decide how much focus or money to budget for the
resolutions of this process deficiency. Activity-based
management includes (but is not restricted to) the use of
activity-based costing to manage a business.


[edit] Marginal Costing
See also: Cost-Volume-Profit Analysis
See also: Marginal cost
This method is used particularly for short-term decision-
making. Its principal tenets are:

Revenue (per product) - Variable Costs (per product) =
Contribution (per product)
Total Contribution - Total Fixed Costs = Total Profit or
(Total Loss)
Thus it does not attempt to allocate fixed costs in an
arbitrary manner to different products. The short-term
objective is to maximize contribution per unit. If
constraints exist on resources, then Managerial Accounting
dictates that marginal cost analysis be employed to
maximize contribution per unit of the constrained resource
(see Development of Throughput

Answer / gohar ali pugc

cost accounting is concerned with the financial decesion
making by the finance maneger.we analize the
finance/monetry involvement in the business.to realize that
how much cash is "in"in the business and how much cash
is "out" in the business.and the decesion must be taken by
the finance department.

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