Cost Systems


Cost Systems

The cost classifications do not provide all required cost data. Most cost planning and control data can only be provided by an adequate cost system, designed so that individual supervisors, department heads, and executives can be held accountable for all costs which are their responsibility. The concepts of authority and responsibility are closely related
to accountability and are carefully considered in evaluating personal performance.

The cost system must be closely tailored to the organizational structure of the company, the manufacturing process, and the type of information desired and required by executives. There are numerous kinds of cost systems, each with its own advantages and disadvantages. The principal types of cost systems, classified according to their particular attribute, are described below.

Nature of Manufacturing

Job order: The cost unit is the job and costs are accumulated by job. It is most suitable where each job or order is different than others, such as in a printing shop.

Process. The cost unit is the average cost for the units produced in a specified period of time, such as a week. The method is most suitable where high-volume similar products are produced, such as those of flour mills, steel mills, paper mills, etc.

Time When Computed

Actual Costs are collected as they occur, but determination of unit costs must wait for completion of manufacturing
operations for the period.

Standard. Costs are. predetermined some time ahead of production. Standards may be used for both quantity
and dollar value. Differences between actual and standard costs are shown in variance accounts which are then analyzed to determine the cause of the difference. Application of Overhead

Direct costing. This method, sometimes called variable costing, assigns only direct product costs to inventory. The fixed overhead costs are charged against revenue in the period incurred.

Full absorption. All costs, including fixed overhead costs, are applied to the product and are included in inventory.

Unit Costs

The total cost figure is usually unsatisfactory from a control standpoint since the quantity of production varies greatly from period to period. Therefore, . some common denominator, such as unit costs, must be available for

comparison of varying
volumes and amounts. The unit cost figure can be readily computed by dividing total costs by the number of units produced. Unit costs may be stated in terms of tons,
gallons, pounds, feet, individual units, etc.

Leave a comment

Your email address will not be published. Required fields are marked *