A cost accounting system (also referred to as product costing mechanism or costing system) is a structure used by that company to calculation the expense of their products for profitability analysis, list valuation and cost control.
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Estimating the accurate cost of products is critical for lucrative operations. A firm must recognize which assets are profitable and i beg your pardon ones are not, and this have the right to be ascertained only once it has estimated the correct price of the product. Further, a product costing device helps in estimating the closing value of materials inventory, work-in-progress and finished items inventory because that the purpose of financial statement preparation.
There room two key cost accounting systems: the job order costing and also the process costing.
Job bespeak costing is a cost bookkeeping system that accumulates manufacturing expenses separately for each job. That is suitable for firms the are engaged in production of distinct products and also special orders. For example, the is the costing bookkeeping system most appropriate for an occasion management company, a niche furniture producer, a producer of really high cost air security system, etc.
Process costing is a cost accounting system the accumulates manufacturing prices separately because that each process. It is suitable for assets whose production is a procedure involving various departments and also costs circulation from one department to another. For example, the is the cost accounting system supplied by oil refineries, chemistry producers, etc.
There are cases when a firm provides a mix of features of both job-order costing and procedure costing, in what is dubbed hybrid cost accounting system.
In a cost bookkeeping system, price allocation is carried out based upon either timeless costing mechanism or activity-based costing system.
Traditional costing system calculates a solitary overhead rate and applies it to each job or in each department.
Activity-based costing on the various other hand, requires calculation of activity rate and application of overhead prices to products based upon their respective activity usage.
Based on even if it is the fixed production overheads room charged to assets or not, cost accounting systems have actually two variations: variable costing and absorption costing. Variable costing allocates only variable manufacturing overheads to inventories, while absorb costing allocates both variable and fixed production overheads to products. Variable costing calculates donation margin, while absorb costing calculates the appropriate gross profit.
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Still further refinement to costing audit systems encompass JIT-costing, back-flush costing.