Three Types...
Cost Accounting is the process by which costs, and to a certain extent, revenue, applied to the minimum basic unit of the business. There are basically three types of Cost Accounting: Job Order Costing, Activity Based Costing, and Process Costing. Which type of costing that a company chooses depends upon how the company wishes to track the costs, how much detail is required for meaningful decisions, whether or not direct costs of products are similar in materials and labor involved or the unit of the sale, and the price of the item being sold. For example, a producer of custom t-shirts may want to use Job Order Costing whereas a cereal manufacturer may want to use Process Costing.
- Job Order Costing takes all of the cost by the various methods and allocates them to per item/per order cost. Such cost as repairs and maintenance costs on the machinery, factory electricity, materials, and most overhead costs are assigned as a cost so that the production facility can regulate and monitor their performance based upon total costs and variations from the standard
- Process Costing takes all of the Costs and allocates them to a pre-determined level of unit of process. The key here is that the end result is not significantly different for the products that are produced, as it is the process that is the critical item. For example, a t-shirt manufacturer who only runs a white t-shirt in one size (and that is the extent of their product line) may be more accurate in using a process costing even though he is producing a product.
- Activity Based Costing is a method of assigning cost in greater detail based upon the cost of various activities applied when completing the project. It breaks the manufacturing/service project into definable and measurable activities that then are combined to arrive at the cost of a product/service.
- Full Allocation Costing is the allocation of all costs, including administrative costs such as the CFO’s salary to every product or process that is being analyzed. Full allocation costing is normally used by small businesses that want to look at the full costs on an item by item basis. It can also be utilized by giant industrial concerns that analyze the full efficiencies of multiple division or operations.
- Partial Allocation Costing is the allocation of only part of the cost over the product or process. Firms that have high material costs as a percentage of product costs may utilize this method in order to monitor the Direct Cost of materials and Sales to a very detailed degree.
- Composite Costing basically takes elements of all the Costing Methods and applies them to arrive at a special cost associated with a product or process. CFO Financial Resources does not suggest that this be used as it can be misleading and can bias in terms of cost toward a particular material, product, or process.
- Implementation of Cost Accounting – we believe that the Cost Accounting System can have a tremendous effect on the profitability of any business, especially a manufacturing entity. In any of its’ projects, CFO Financial Resources will train the staff of the company so that the Company is not only capable of running and analyzing the Cost Accounting System, it also feels comfortable doing so.
