Cost accounting is distinct and separate from general financial accounting, which is regulated by the Securities and Exchange Commission and the Financial Industry Regulatory Authority and is critical for creating financial statements.
Cost accounting is for inside use. It helps company management to make decisions and is tailored to the specific needs of each separate firm. This differs from financial accounting, which must follow a set template and is used to inform people outside the company, such as investors, about its financial performance.
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In contrast to general accounting or financial accounting, the cost-accounting method is an internally focused, firm-specific system used to implement cost controls. Cost accounting can be much more flexible and specific, particularly when it comes to the subdivision of costs and inventory valuation. Cost-accounting methods and techniques will vary from firm to firm and can become quite complex.
Cost accounting is helpful because it can identify where a company is spending its money, how much it earns, and where money is being lost. Cost accounting aims to report, analyze, and lead to the improvement of internal cost controls and efficiency. Even though companies cannot use cost-accounting figures in their financial statements or for tax purposes, they are crucial for internal controls.
These will vary from industry to industry and firm to firm, however certain cost categories will typically be included (some of which may overlap), such as direct costs, indirect costs, variable costs, fixed costs, and operating costs.
Since cost-accounting methods are developed by and tailored to a specific firm, they are highly customizable and adaptable. Managers appreciate cost accounting because it can be adapted, tinkered with, and implemented according to the changing needs of the business. Unlike the Financial Accounting Standards Board (FASB)-driven financial accounting, cost accounting need only concern itself with insider eyes and internal purposes. Management can analyze information based on criteria that it specifically values, which guides how prices are set, resources are distributed, capital is raised, and risks are assumed.
Cost-accounting systems ,and the techniques that are used with them, can have a high start-up cost to develop and implement. Training accounting staff and managers on esoteric and often complex systems takes time and effort, and mistakes may be made early on. Higher-skilled accountants and auditors are likely to charge more for their services when evaluating a cost-accounting system than a standardized one like GAAP.
Fleischman, Richard K., and Thomas N. Tyson. "The Economic History Review: Cost Accounting During the Industrial Revolution: The Present State of Historical Knowledge." Economic History Review, vol. 46, no. 3, 1993, pp. 503-517.
Labor refers to any wages to employees which relate to a specific aspect of producing products or delivering services. Wages can include salaries, hourly rates, overtime, bonuses and employee benefits.
Overheads are costs that relate to ongoing business expenses that are not directly attributed to creating products or services. Office staff, utilities, the maintenance and repair of equipment, supplies, payroll taxes, depreciation of machinery, rent and mortgage payments and sales staff are all considered overhead costs.
Standard cost accounting is a traditional method for analyzing business costs. It assigns an average cost to labor, materials and overhead evenly so that managers can plan budgets, control costs and evaluate the performance of cost management. Many small businesses prefer standard cost accounting due to its ease and simplicity.
Activity-based accounting (ABC) assigns overhead costs to products and services to give you a better idea of what they cost. Compared to standard cost accounting, ABC dives deeper into the cost of manufacturing a product or providing a service. It can help explain which activities increase production costs.
Also known as marginal costing, marginal cost accounting reveals the incremental cost that comes with producing additional units of goods and services. With marginal cost accounting, you can identify the point where production is maximized and costs are minimized.
Lean accounting is designed to streamline accounting processes to maximize productivity and quality. It eliminates unnecessary transactions and systems, reducing time, costs and waste. You can use it to understand what creates the most value for your customers and how you can continuously improve.
Cost accounting is specifically intended for managers and employees who are a part of your business and responsible for making important decisions. It can help them improve operations and increase profitability.
Cost accounting can give your business detailed insight into how your money is being spent. With this information, you can better budget for the future, reduce inefficiencies and increase profitability.
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L7 helps you benchmark your current cost accounting model capabilities against your peers. Each level of the L7 Model builds upon the level before, allowing an organization to increase the accuracy of cost accounting and more easily access cost data with dynamic, actionable methodologies. As you move up to the next level, you deploy more sophisticated costing processes and workflows and generate more meaningful and accurate output. The model also assesses current gaps in source system data to help standardize and automate data capture.
The base of the model represents healthcare organizations with a basic cost accounting model and tool that deploys ratio of cost to charge based methods, reflecting hospital cost accounting basics. An organization that is at Level 7 has expanded the use of time-driven costing to all clinical areas and engages clinicians with the cost data to help drive performance improvements.
Uniform Guidance 2 CFR 200.56, disallows the direct charging of facilities and administrative type costs on federal sponsored agreements. However, there are certain unique exceptions to this rule allowing for the direct charging of these types of costs in the event the University can justify the charges. Determining if a cost should be included as a direct cost should normally be done at the proposal stage. There are certain departmental costs which are included as Facilities and Administrative (F&A), and therefore, should not be included as a direct cost. Principal Investigators (PI) should work closely with the Research Administrator to ensure that costs normally considered F&A are not included as direct costs in a proposal, unless there is a compelling reason to do so. See Policy RA21 Development of Proposal Budget for additional guidance.
These costs may be permissible as direct charges. Adequate justification regarding the allowability and allocability of the expense must be documented, through the justification form. The justification must provide detail regarding:
At the discretion of the Administrative Area, the justification can be prepared either during proposal preparation or when allocating the cost to a sponsored program. The preferred method is during proposal preparation. The cost must be approved before being charged to the sponsored program. Regardless of the timing, the proposal should provide detailed justification for including these costs as direct charges. Generally, if the cost is not included in the proposal, it will not be permitted as a direct cost at the time of purchase.
Administrative or clerical salaries are not allowable unless they are explicitly included in the budget or have the prior written approval of the Federal awarding agency (2 CFR 200.413(c)).
The appropriate form - one for Administrative/Clerical costs and the other for Non-Personnel costs - must be completed as indicated, and signed by the Principal Investigator, and approved by those listed. Approval indicates the following:
These forms have the digital ID (signature) process enabled. The PDF version has instructions provided for the type and/or format of information to be included within the fill-and-print form fields. Hovering the computer mouse over any form field within the PDf will display these instructions. See Converting Web-based Documents to PDF Documents for details. See Applying Digital IDs When Document Contains Multiple Signatures for instructions on adding signatures.
No form may be used that substitutes for an approved official University form without prior review and approval by the steward of the form/central office, as facilitated by the Office of Systems and Procedures (designated representative of the Associate Vice President for Budget and Finance). See Policy FN17 Required Use of Approved University Forms Appearing in the General University Reference Utility (GURU) for full details.
GURU PDF forms are designed for use with Adobe Acrobat Reader or Adobe Acrobat Pro. Each browser (Chrome, Firefox, Internet Explorer, etc) has a built-in PDF viewer making it the default PDF viewer without asking users. These built-in viewers do not necessarily support all features required for PDF Forms. Similarly, many calculations are not supported by other stand-alone PDF readers (for example, Nuance). If you experience problems downloading or opening documents, right click on the link on the Forms Locator Screen, select 'Save Link As' (or similar language) and save the file. The document can then be opened in either Adobe Acrobat Reader or Adobe Acrobat Pro from the saved location. 152ee80cbc
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