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Types of Cost Accounting

This document discusses several types of cost accounting methods: Standard cost accounting tracks actual costs against expected standard costs based on past experience or market research. Activity-based costing assigns costs to products based on the activities and resources consumed in their production. Marginal costing only assigns variable costs to products and considers fixed costs as period expenses. Lean accounting recognizes the costs of excess inventory by considering holding costs and opportunity costs in addition to traditional accounting metrics.

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124 views3 pages

Types of Cost Accounting

This document discusses several types of cost accounting methods: Standard cost accounting tracks actual costs against expected standard costs based on past experience or market research. Activity-based costing assigns costs to products based on the activities and resources consumed in their production. Marginal costing only assigns variable costs to products and considers fixed costs as period expenses. Lean accounting recognizes the costs of excess inventory by considering holding costs and opportunity costs in addition to traditional accounting metrics.

Uploaded by

Legends Funanza
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Types of Cost Accounting

Standard Cost Accounting


Standard Costing is an accounting system used by manufacturers to identify and analyze the
differences between the actual costs of producing goods and the costs that should have occurred
to produce those goods.

The costs that should have occurred to produce goods are known as standard costs. These costs
are based either on the past reports/experience of the firm or market research conducted by
management. Standard costs involve product costs, direct material costs, direct labor costs, and
manufacturing overhead costs.

Activity-Based Cost Accounting


Activity-based costing is a costing method in which various activities in an organization,
typically a factory, are identified and then costs are allocated to these activities. The costs
accumulated in these activities are further allocated to the products and services based on the
actual consumption by each product. Activity-Based Costing assigns costs to products, services
based on:

 Activities which go into their production

 Quantity of resources consumed by these activities

Steps in using Activity Based Costing

 ABC costing is a bit complex. So, to simplify it, let us understand it with the help of an
example. Suppose there is a firm which manufactures jeans, shirts, and trousers. The firm
wants to calculate how much it costs to produce jeans, shirts, and trousers individually.
The firm decides to use ABC costing to find out the relevant costs. Following are the
steps which firms will have to take:

Identify Activities

Identify what all activities are required to manufacture the product. In our example, the activities
may be purchasing, processing, transporting, etc.

Marginal Cost Accounting


Marginal Costing is the type of costing in which only variable costs are assigned to the product
while the fixed costs are considered as the costs for the period. This means that the fixed costs
such as rent, electricity, etc are directly a part of the Income Statement as expenses and are not
assigned to any particular product.

The marginal cost of a product is its variable cost. This cost includes items such as direct
material costs, direct labor costs, etc. As the volume of production changes, these costs also
change proportionately. Fixed costs, on the other hand, are costs which remain unchanged
regardless of the volume of production.

In this approach, it is not possible to identify net profit per product since we don’t know how
much of the fixed cost belongs to an individual product. This approach only gives the amount of
contribution to fixed costs and profits. The contribution is the difference between total revenue
and the total variable costs.

Lean Accounting
Lean accounting has some principles and processes that provide numerical feedback for
manufacturers implementing lean manufacturing and lean inventory management practices.
Traditional accounting system recognizes inventory as an asset even if the inventory sits on the
shelf for a year and has holding costs associated with it. Lean accounting, however, takes into
account that more than necessary inventory at a time is bad for the company and has costs
associated with it in terms of holding costs, the opportunity cost of the cash blocked in inventory,
etc. Lean accounting takes this into account and defines efficiency, not in terms of production in
a month; rather, it defines efficiency in terms of how much time processing an order takes?

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