The Importance of Using Efficient Cost Accounting Techniques
Cost accounting describes the process of accumulating, measuring, analyzing, interpreting and reporting cost information. Different cost accounting techniques are utilized in different areas of work. However, the general cost accounting techniques includes an input measurement basis, inventory valuation technique, cost accumulation technique, a cost flow assumption as well as recording of inventory cost flows at specific intervals.
The base of any cost accounting system starts with the kind of costs which flow inside as well as across the inventory accounts. The basis allows three alternatives. These are standard costing, normal historical costing and pure historical costing.
The techniques of inventory valuation control the way by which net income is calculated. While activity based costing involves tracing the highest amount of costs to an inventory, the throughput method includes tracing the minimum cost to an inventory. In variable or direct costing, a higher amount of cost in traced as compared to the throughput method. However, the amount is less as compared to full absorption method. The conventional techniques of inventory valuation include full absorption costing and direct costing. Moreover, the technique such as activity based costing and throughput method are comparatively new.
Cost accumulation describes the approach towards collection and identification of costs with specific orders, customers, departments, batches, processes and jobs. The focus of cost accumulation could be specific customers, products generated in an individual segment during a particular period, batches of products which might involve a number of customers or the products which are produced by a plant during a certain period. The methods of cost accumulation are affected by the kind of production operation.
A cost flow assumption describes the flow of cost within the inventory accounts. It does not refer to the flow of products over a production line or the flow of work. Moreover, it must be understood that the flow of cost need not be same as flow of work. The different types of cost flow assumptions are first-in first-out (FIFO), last-in and first-out (LIFO), weighted average and specific identification.
Generally, inventory records are maintained on a periodic or perpetual basis. Theoretically, perpetual inventory method offers the capability of maintaining records on a continuous basis. The records of quantities of inventory as well as costs flowing throughout the inventory accounts can be easily maintained. However, the periodic method involves counting the inventory before the records are updated.
The cost accounting techniques enable in simplifying the work of a cost accountant. Not only do these techniques give a direction to work, but also provide accuracy and precision in the results.