Cost Accounting Notes 1 Introduction to Cost Accounting Cost accounting is the process of recording classifying analyzing and summarizing costs for the purpose of managerial decision making It involves tracking and managing costs related to production operations and other business activities 2 Objectives of Cost Accounting Determine the cost of products services or activities Control and manage costs to improve profitability Assist in planning and decision making Provide information for cost control and performance evaluation Facilitate budgeting and variance analysis 3 Cost Classification Costs can be classified as direct costs attributable to a specific product or activity or indirect costs not directly traceable Variable costs change with production levels while fixed costs remain constant Prime costs include direct materials and direct labor while conversion costs include direct labor and manufacturing overhead 4 Cost Behavior Understanding cost behavior is crucial for cost analysis Costs can be categorized as variable fixed semi variable or step costs The cost volume profit CVP analysis examines how costs and revenues change with changes in production and sales levels 5 Costing Methods Job Order Costing Used for customized or unique products Process Costing Used for homogeneous mass production Activity Based Costing ABC Allocates costs based on activities and resource consumption Standard Costing Compares actual costs to predetermined standards 6 Cost Allocation Overhead costs are often allocated to products or departments using allocation bases such as labor hours machine hours or activity based Allocation helps determine the full cost of products for pricing and methods decision making 7 Budgeting and Variance Analysis Budgets set financial targets for the organization Variance analysis compares actual performance to budgeted amounts Variances can be favorable actual costs are lower than budgeted or unfavorable actual costs exceed budgeted 8 Inventory Valuation Different methods such as FIFO First In First Out LIFO Last In First Out and weighted average are used to value inventory The choice of method affects the cost of goods sold and inventory values on the balance sheet 9 Cost Control and Management Cost control involves monitoring and managing costs to ensure they align with budgets and objectives Cost reduction strategies aim to minimize costs without compromising quality or performance 10 Decision Making with Cost Data Cost data is critical for various decisions including pricing product mix make or buy and capital investment Relevant costs costs that change with the decision are considered in decision analysis 11 Reporting and Analysis Cost accountants prepare reports for management including income statements budget performance reports and variance analysis These reports help management make informed decisions and evaluate the financial performance of the organization 12 Ethical Considerations Cost accountants must adhere to ethical standards and ensure accurate reporting of costs and financial information Cost accounting plays a vital role in managerial decision making cost control and the overall financial health of an organization These notes provide a general introduction to key concepts in cost accounting In practice cost accounting can become quite complex depending on the industry and specific business needs