Costs and revenue are the two deciding elements of profits. By growing the revenue base and maintaining costs at an acceptable level, companies can make higher profits. Costing and cost accounting is used to manage and arrive at decisions regarding costs. The key difference between costing and cost accounting is that while costing is referred to as the exercise of determining costs, cost accounting is a systematic process of analyzing, interpreting and presenting costing information to the management to facilitate decision making.
1. Overview and Key Difference
2. What is Costing
3. What is Cost Accounting
4. Side by Side Comparison – Costing vs Cost Accounting
What is Costing?
A ‘cost’ can be defined as the monetary value spent to acquire something and costing is the process of determining and recording cost. Costs are incurred by both manufacturing and service organizations. For instance, if a manufacturing organization is considered, it will incur costs in the form of material, labor, and other overheads and produce a number of units. The total cost incurred can be divided by the number of units produced to arrive at the unit cost of production. Costs can be classified in various ways. A widely used classification is as shown below.
These are costs that can be directly traced to a unit of output. It can be clearly identified how much of these costs are consumed by the business in manufacturing a unit of output.
E.g. Direct material, direct labor, commissions
Indirect costs are utilized by a collection of activities, thus they cannot be identified in relation to a specific unit. These are overhead costs that do not fluctuate significantly depending on the level of production.
E.g. Rent, office expenses, accounting expenses
Fixed costs are the costs that do not change with the level of activity. They cannot be reduced or avoided depending on how many units are produced; however they can be increased once a threshold level is reached. Such fixed costs are referred to as ‘step fixed cost’. Fixed costs are largely similar to indirect costs
E.g. salaries, rent, insurance
Variable costs alter with the level of output, thus they are similar to direct costs.
Semi- variable Costs
Also known as ‘mixed costs’ these have a fixed and a variable element.
E.g. A company has one manufacturing plant that has the capacity to produce 1,000 units. Rent for the plant is $2,750 per month. The company receives a special order to produce 1,500 units within the upcoming week for which a new space should be rented for $400 to produce the additional 500 units. In this situation, $2,750 is a fixed element and $400 is a variable element.
Costing is one of the most important aspects of a company and understanding how each cost affect the overall business is vital to determine costs accurately. Costing is an integral part of the determination of profit.
What is Cost Accounting
Cost Accounting is a systematic process of analyzing, interpreting and presenting costing information to the management to facilitate decision making. The scope of cost accounting involves preparation of various budgets for the company, determining standard costs based on technical estimates, finding and comparing with actual costs and quantifying the reasons of by variance analysis.
Objectives of Cost Accounting
Costs for the upcoming accounting year has to be estimated at the end of the current financial year through the preparation of budgets. A budget is an estimate of incomes and expenses for a period of time. Budgets can be prepared in two ways: incremental budgets and zero-based budgets. In incremental budgeting, an allowance for costs and incomes are added to the upcoming year based on resource consumption in the prevailing year. Zero-based budgeting is a method of justifying all costs and incomes for the next year disregarding current year’s performance.
Accumulating and Analyzing Costing Data
This is done through standard costing and variance analysis. Standard cost for units of material, labor and other costs of production for a pre-determined time period will be assigned for each activity of the business. At the end of this period, the actual costs incurred may be different to the standard costs, thus ‘variances’ may arise. These variances should be analyzed by the management and reasons for the same must be determined.
Cost Control and Cost Reduction
This will be done based on the results of variance analysis. Unfavorable variances relating to costs should be corrected through proper cost control. This can be achieved by eliminating non-value adding activities and further strengthening business processes.
Determining Selling Prices
Cost accounting is the basis used to finalize selling prices since the prices should be set to facilitate achievement of profits. Inaccurate costing information may also result in determining high selling prices, which will lead to a loss of customers.
Cost accounting is a practice carried out in order to provide information for internal stakeholders in the company, especially management. Thus, the manner information is presented, the format of reports are tailor-made to suit the requirements of the management. This is different to financial accounting where information should be presented in rigid specific formats.
What is the difference Between Costing and Cost Accounting?
Costing vs Cost Accounting
|Costing is an exercise of determining costs.
|Cost Accounting is used to analyze, interpret and presenting costing information to the management to facilitate decision making.|
|Costing involves classifying and recording costs according to their effect on the business.||Cost Accounting involves estimating, accumulating and analyzing of costing information.|
|Costing is not used for decision making, this is merely classifying and recording costs incurred within a period of time.||Cost Accounting is used by management to take vital decisions regarding cost control and cost and determining selling price.|
Summary – Costing and Cost Accounting
Costing and cost accounting contributes to a significant area of management accounting which is primarily concerned with management decision making. The main difference between costing and cost accounting is that costing classifies and record the costs while cost accounting uses this recorded data for decision making purpose. Thus, cost accounting is an extension of costing and both share similar underlying principles.
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