University Cost Accounting Report: Methods, Issues, and Applications

This report delves into the realm of cost accounting, exploring its fundamental concepts, methods, and real-world applications. It begins by defining cost accounting and highlighting its importance in business operations, emphasizing its role in cost control, price determination, and performance ev...Read More

Running head: COST ACCOUNTING
COST ACCOUNTING
Name of the Student:
Name of the University:
Author Note

1COST ACCOUNTING
Table of Contents
Introduction................................................................................................................................2
Discussion..................................................................................................................................2
Cost Accounting.....................................................................................................................2
Important of Cost Accounting................................................................................................3
Types of Cost.........................................................................................................................5
Methods of Cost Accounting.................................................................................................6
Issues of Cost Accounting......................................................................................................8
Learnings..................................................................................................................................10
Conclusion................................................................................................................................11
References................................................................................................................................12

2COST ACCOUNTING
Introduction
The chosen topic for this paper is “Cost Accounting”. The cost accounting is the
process of recording, analysing, classifying, allocating and summarizing costs related to the
operations and then develop various course of action to control the cost. The main objective
of the cost accounting is to advise the management how to optimise business process and
business practice based on cost efficiency and capability. The cost accounting provides the
detailed information of cost that management needs to make several favourable decision of
the current business operation and for the plans for future operation. This paper is prepare to
analyse and understand the cost accounting method. Along with the important of the coast
accounting in respect to the success of firm. This paper also analyse the various methods of
the coast accounting and there uses. Further, this paper identifies the main issues in the cost
accounting. The main objective behind the preparation of this paper is to gather the new
learnings about the cost accounting and their application in real life in real time basis.
Discussion
Cost Accounting
Cost Accounting is an accounting method to capture the cost of production of the
company. Cost Accounting considers the input costs of each step of the production along
with the fixed costs of the company related to the production such as depreciation of the fixed
assets. This method firstly measures and records all related cost of production separately an
then compare this input cost of the firm with the output result to measure the financial
performance efficiency of the company (Ellul, 2015). In simple word, the cost accounting
calculates all the cost related to the production of the company both variable as well as fixed
cost. In this method all cost are firstly, identified and reported individually and then the total
cost of the production is compared by the total output of such product (Schaltegger &

3COST ACCOUNTING
Zvezdov, 2015). The difference between the cost of production and output of the product is
reported to the management, which helps the management to analyse the efficiency of their
performance. This is a mostly used method of the accounting to determine the cost of the
product and to analyse the efficiency of the management to reduce the cost of the production.
This is very useful to the management of the company to make several operation and
production related decision.
Important of Cost Accounting
The cost accounting perform various role in the successive planning of the firm. The
cost accounting plays very important role for the management to perform the various
functions to make the future successive plans for the firm:
 Classification of costs
The cost of any firm is very generic in nature and it should be classified for further
use. The cost accounting helps the management to determine and classify the cost incurred by
the firm (Christ & Burritt, 2015). For example, prime cost, factory cost, direct cost, selling
cost and like. This classification made by the cost accounting helps the management to
increase the profitability of the firm by controlling the cost. This also make easy to calculate
the efficiency of the firm. This method simply classified the costs in the varies required
terms.
 Cost control
To increase the efficiency of the firm, management need to do focus in controlling the
cost of the firm. To understand in better way, management can adopt the cost accounting’s
EOQ technique for inventory management to achieve the maximum efficiency in the
inventory management (D'Onza, Greco & Allegrini, 2016). This also classifies the overheads
into variable cost and fixed cost along with the controllable and uncontrollable, which also

4COST ACCOUNTING
play an important role in increasing the efficiency of cost of labour and capacity of
machinery. In simple, this method helps the management to increase the efficiency of the
firm’s operation and business of the firm.
 Price determination
The cost accounting divides the basic cost of production into fixed and variable costs.
This distinction helps the management to determine the fixed cost of the products. This also
helps the management to determine the ideal price of the product that is neither too high nor
too low (Klychova, 2015). This also help the management to determine the profit associated
with the price of the product.
 Fixing the standards
There is an entire branch in cost accounting named as Standard Costing, which help
the management to set the various standards. The management needs these standards to
estimate and budget the future operations and the production of the firm (Bragg, 2016).
Apart from the above, the cost accounting have some other importance in the different
stakeholder’s point of view. Those are:
 Employees
Cost accounting is also useful for the employee as the management measure the
efficiency of the employee with help of the cost accounting and make the incentive plans for
the employee based on their performance.
 Government
Cost accounting also helps the Government to assessing the tax or any other
Government payable for the firm. This also helps government to set various industry
standards like the price fixing, cost control and tariff plans and same likes.

5COST ACCOUNTING
 Customers
The main objective of the cost accounting are increasing the company’s efficiency
related to its operation and production. Along with, to control costs of production and
operation (Maskell, Baggaley & Grasso, 2016). The both are highly beneficial to the
company and the same transferred by the company to customers in the form of products and
services.
Types of Cost
To understand the concept of the cost accounting and the various method of cost
accounting in a better way, the understanding of different type of Cost is required. The
followings are the brief of the some important cost types:
 Fixed Cost
Fixed cost are those cost, which don not varies due to the amount of production of the
firm. These are usually remains fix. For example, rent of the factory and machineries, which
depreciates in fixed rate.
 Variable Cost
Variable cost are those cost, which depends on the level of production of the firm. If
the production increases then the variable cost will also increases depending on the
production of the firm and vice versa (Garvey, Book & Covert, 2016). For example,
electricity bill of the manufacturing unit, if the machines runs more for the high production
then the cost of electricity will also increase.
 Operating Cost

6COST ACCOUNTING
The cost associated with the day-to-day operation of the firm is known as Operating
costs. These can be fixed or the variable depending on the situation.
 Direct Cost
The costs, which are directly related to the product ion of the company is known as
direct cost or Direct overhead. In other words, such costs, which are incurred by the firm only
to produce the product is known as direct cost (Viscarra Rossel & Brus, 2018). For example,
cost of raw material and the handling charges of the raw material.
Methods of Cost Accounting
There are various methods of the cost accounting in different point of views. Here,
this paper consider those methods of cost accounting, which are mostly used by the firms in
real life application. The methods are:
 Standard Cost Accounting
This method of cost accounting consider the ratios to compare efficient uses of
material and labour to manufacture the product under the standard conditions. This difference
analysis is known as variance analysis (Zhao & Huang, 2016). The traditional cost
accounting essentially allocates the costs of production based on one-scale, labour or machine
hours. Due to the fact that overhead cost has risen proportionate to labour cost accounting,
the allocation of the direct costs has ended up producing occasionally misleading insights.
Some other issues related to this method are that this type of accounting emphasizes labour
efficiency despite the fact that it makes up a comparatively small amount of the costs for
modern companies.
 Activity Based Accounting

7COST ACCOUNTING
The activity based accounting can be defined as “an approach to the costing and
monitoring of activities which involves tracing resource consumption and costing final
output, resources assigned to activities, and activities to cost objects based on consumption
estimates. The latter utilize cost drivers to attach activity costs to output.”
In simple words, activity based costing accumulates the costs from each departments
and assign them into the specific cost objects, such as products, customer or services (Mahal,
& Hossain, 2015). The method of assigning the cost objects are firstly determined in the
activity analysis, where appropriate are based on the cost drivers. Hence, the result computed
by the activity based accounting is more accurate and helpful to the management of the firm
to analyse and understand the cost and profitability of their company in respect of the
specified product and services (Xu, Ranftl & Koltun, 2017).
 Lean Accounting
The lean accounting is the developed from the philosophy of lean manufacturing and
production by the Japanese companies in the year 1980. Most accounting practices for
manufacturing works based on the assumption, whatever will be produce will be produced in
large scale (Amos et al, 2018). The lean accounting replace the standard costing, cost plus
pricing and activity based accounting or any other management accounting system with the
value based pricing and lean focused performance measurements.
 Marginal Costing
This is consider as the simplified method of cost accounting. This method analysis the
relationship between the sale price, amount produce, volume of sale, expenses, profit and cost
of the product and services. The specific relationship is called as the contribution margin. The
contribution margin is calculated after dividing revenue minus variable cost, by revenue
(Dale & Plunkett, 2017). This analysis help the management to determine the potential profits

8COST ACCOUNTING
as impacted by changing costs, to determine the sale price and to determine the type of
advertisement campaigns.
In uses point of view, the cost accounting methods are further classified in several
types. Some important method cost accounting as per the uses are:
 Unit Costing: - This method is also known as output costing. This method is useful
for such firms, which manufactures the products in identical units and perform
continuous performance (Soliman, 2017). For example, mining and dairy products.
 Job Costing: - In this method, the cost of production is calculated separately for each
work order as the each order has its own specification and scope. The firms like
painting and building repairing use this method.
 Contract Costing: - This method is used for such projects, which involve heavy
expenditure and stretches over long period and across different sites. This also known
as terminal costing.
 Batch Costing:- This method is applicable for the firms that produces the products in
batches that are same in design and nature.
 Process Costing:- This is used by the firms, which produce the product through
different processes. For example, clothing manufacturing firm, which produce the
clothes by using the different processes.
Issues of Cost Accounting
While having various importance and advantages, the cost accounting also have some
issues with the implication in real life. Those issue or disadvantages are:
 Complexity
The cost accounting is required to identify and allocate the different types of cost, it is
consider as a complicated method of accounting. It needs various different formula and forms

9COST ACCOUNTING
to collect and analyse the data to calculate the result. This also requires number of steps to
ascertain the result. This complexity in the system of the cost accounting is one its major
issue.
 Expensive
To install and maintain the cost accounting system in the firm requires more work
force and resources. More analysis, absorption and allocation of expenses is requires
considerable amount of additional work (Anh, 2016). If the cost incurred to ascertain the
expenses is more than what is derived from it, then the process of costing is meaningless. In
simple word, the expenses of the cost accounting should not more than the profit derives from
it.
 Inapplicability
The techniques and methods of the cost accounting is varies from firm to firm. One
method of cost accounting is not applicable for other entire firm depending of their product
and services (Maskell, 2017). If the firm adopts the wrong technique then it should affect the
result. It implication issue is also a major concern of cost accounting.
 Suitability
As discussed above it is very expensive and complex system of accounting, it is not
suitable for the small firms. Also the techniques of the cost accounting is not appropriate for
the small scale organisations.
 Accuracy

10COST ACCOUNTING
Some notional cost concept of cost accounting is less accurate like standard cost,
estimated cost and likes would not calculates the actual cost of the product. So, the result of
the cost accounting is less accurate.
 Duplicative
Many of the firm is capable to perform effectively and control the costs effectively
with financial accounting. Therefore, preparing cost accounting for them is useless and
involves duplication of accounting work.
 Basis
The most of data used by the company is based on the estimation of the indirect costs,
previous data and assumption. This accounting not use the actual data, which is also an issue
with this accounting.
 Only for management
The cost accounting only serves the information to the management need. The
different stakeholders of the firm like shareholder, employee and creditors cannot depends on
the cost accounting for their financial information required to analyse the company (Shigaev,
2015). The cost accounting is only useful and beneficial for the management while the
stakeholders of the company need financial accounting system for the required financial
information to make decision.
Learnings
This paper helps to learn the entire concept related to the cost accounting. This paper
helps shows that how the cost accounting identifies and classified the cost into the various
categories as per the requirement. From this paper, the different method of the cost
accounting can be understand and the implication of such methods are be understand. It also

11COST ACCOUNTING
help to understand the advantages and the important of the cost accounting in terms of
implication in the real life approach. This paper analyse the advantages and importance of the
cost accounting in the real life implication of the system. While, this paper also aware about
the drawbacks of the cost accounting system while implement in the real life firm’s
operation. Apart from that paper provides some other issues related to the cost accounting
system such as expensiveness, complexity and based on assumption.
Conclusion
This paper concludes that cost accounting is the process of identifying, classifying
and managing the cost of production for the firm. The cost accounting play an important role
in the successive planning of the firm and help to identifying the cost, classifying the cost and
managing the cost of production to increase the efficiency of the firm. There are various type
of cost, which is identified by the coast accounting like direct cost, variable cost and same
likes. The cost accounting divides the production cost in various cost named direct cost,
indirect cost and it alike. Further, this report also concludes some issues of the cost
accounting like expensive implementing cost, complex method of valuation, not suitable for
the small firm, only useful for the management and it likes.

12COST ACCOUNTING
References
Amos, T. B., Tandon, N., Lefebvre, P., Pilon, D., Kamstra, R. L., Pivneva, I., & Greenberg,
P. E. (2018). Direct and Indirect Cost Burden and Change of Employment
Status in Treatment-Resistant Depression: A Matched-Cohort Study Using a
US Commercial Claims Database. The Journal of clinical psychiatry, 79(2).
Anh, P. T. H., Ross, H., Anh, N. Q., Linh, B. N., & Minh, N. T. (2016). Direct and indirect
costs of smoking in Vietnam. Tobacco control, 25(1), 96-100.
Bragg, S. M. (2016). Cost accounting fundamentals. Colorado, CO: Accounting Tools.
Christ, K. L., & Burritt, R. L. (2015). Material flow cost accounting: a review and agenda for
future research. Journal of Cleaner Production, 108, 1378-1389.
Dale, B. G., & Plunkett, J. J. (2017). Quality costing. Routledge.
D'Onza, G., Greco, G., & Allegrini, M. (2016). Full cost accounting in the analysis of
separated waste collection efficiency: A methodological proposal. Journal of
environmental management, 167, 59-65.
Ellul, A., Jotikasthira, C., Lundblad, C. T., & Wang, Y. (2015). Is historical cost accounting a
panacea? Market stress, incentive distortions, and gains trading. The Journal
of Finance, 70(6), 2489-2538.
Garvey, P. R., Book, S. A., & Covert, R. P. (2016). Probability methods for cost uncertainty
analysis: A systems engineering perspective. Chapman and Hall/CRC.
Klychova, G. S., Zakirova, A. R., Zakirov, Z. R., & Valieva, G. R. (2015). Management
aspects of production cost accounting in horse breeding. Asian Social
Science, 11(11), 308.

13COST ACCOUNTING
Liu, Y., & Tyagi, R. K. (2017). Outsourcing to convert fixed costs into variable costs: A
competitive analysis. International Journal of Research in Marketing, 34(1),
252-264.
Mahal, I., & Hossain, A. (2015). Activity-Based Costing (ABC)–An Effective Tool for Better
Management. Research Journal of Finance and Accounting, 6(4), 66-74.
Maskell, B. H., Baggaley, B., & Grasso, L. (2016). Practical lean accounting: a proven
system for measuring and managing the lean enterprise. Productivity Press.
Maskell, B. H., Baggaley, B., & Grasso, L. (2016). Practical lean accounting: a proven
system for measuring and managing the lean enterprise. Productivity Press.
Obeid, T., Alshaikh, H., Nejim, B., Arhuidese, I., Locham, S., & Malas, M. (2017). Fixed and
variable cost of carotid endarterectomy and stenting in the United States: A
comparative study. Journal of vascular surgery, 65(5), 1398-1406.
Schaltegger, S., & Zvezdov, D. (2015). Expanding material flow cost accounting.
Framework, review and potentials. Journal of Cleaner Production, 108, 1333-
1341.
Shigaev, A. (2015). Accounting entries for activity-based costing system: The case of a
distribution company. Procedia Economics and Finance, 24, 625-633.
Soliman, A. M., Yang, H., Du, E. X., Kelley, C., & Winkel, C. (2016). The direct and indirect
costs associated with endometriosis: a systematic literature review. Human
Reproduction, 31(4), 712-722.
Viscarra Rossel, R. A., & Brus, D. J. (2018). The cost‐efficiency and reliability of two
methods for soil organic C accounting. Land degradation &
development, 29(3), 506-520.

14COST ACCOUNTING
Xu, J., Ranftl, R., & Koltun, V. (2017). Accurate optical flow via direct cost volume
processing. In Proceedings of the IEEE Conference on Computer Vision and
Pattern Recognition (pp. 1289-1297).
Zhao, P., & Huang, S. (2016, December). Cost Accounting Teaching: Focus on the Processes
and Operations. In 2016 International Conference on Advances in
Management, Arts and Humanities Science (AMAHS 2016). Atlantis Press.