Cost accounting


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I would like to learn more about cost accounting, but it is unclear to me what cost accounting method is best?

Is there a general consensus on what cost accounting method is the best or what is most used today?

To be more specific, if I wanted to calculate costs for a carpentry of about 40 FTE's, what method would be best suited? For now, Activity Based Costing (ABC) and lean costing seems most promising, but I could be totally wrong.

On top of that, I'm also looking for a good book. Is there a must-read or some kind of "bible" for cost accounting.
 
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Werner Reisacher

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The costing system that provides you with all the information you need to draw conclusions and implement corrective actions in a timely manner, at the lowest possible cost, is the best. There is no one fits all solutions.

You can compare the function of cost accounting with that of a meat grinder. Financial Accounting is dumping a bunch of data into the machine, the data is processed and pushed through “filters” and exactly the same amount of data is coming out, just sliced and sorted by different categories and types of data.

The simplest form of Cost accounting is the allocation of actual costs incurred to individual projects, such as a plumber installing a kitchen sink, or a car mechanic fixing engine problems.

When the time it takes to produce a “finished product” exceeds an accounting period, accumulated costs need to be temporarily capitalized as WIP by type of categories and type of costs. Under a Direct Costing Method, all direct costs (production labor, material, etc.) are capitalized, all overhead cost is expensed during that accounting period.

Under the Absorption Costing Method, both direct and indirect costs are capitalized.

Today, Standard Costing is pretty much the Standard in major Manufacturing companies. Costs are allocated to “cost centers” and from there, re-distributed to individual products. An individual production machine can be a “cost center”.The accumulated cost can be further broken down into the processes (activities) that are needed to keep that machine running. (production, changing tools, cleaning, maintenance)

The system is called “Standard Costing” since engineers and/or trained cost accountants have calculated the optimal quantities and times of material and labor that are needed to complete each process. These Standard values have the function of a “Budget”. At the end of and accounting period, cost accountants are analyzing the variances which lead them to the source where the deviations from the standards have occurred.

Activity-Based Costing is not much more than a finer tuned Standard Costing Systems. As a salesman, you want to offer customers cars in any color they want. Cost accountants know that batch processing results in optimal costs. Interrupting a batch for changing colors for one car is creating costs that go far beyond the time it takes to paint that individual car. They decided to allocate such downtime (changing color, changing tools, or molds) to a new cost center “retooling” and re-allocate these costs directly to that particular “nonstandard product” that caused the interruption. The term “Activity Based Costing” was coined.

To summarize, cost accounting is where the action is. You will actually learn more about cost accounting from engineer’s than from accountants. It is an ongoing fine-tuning of the processes that drive the quality and cost of a final product.

My favorite books that are actually not dealing with cost accounting methods but teach you all about process control are under the title KAIZEN. A method that an American introduced under a foreign aid program after WWII and resulted in the success of the Japanese Car Industry.
 
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These are the costs directly related to producing, acquiring and selling the company's products. They include things like labour costs and electricity costs. There are mainly four types of cost accounting: standard cost accounting, activity based accounting, lean accounting and marginal costing.
 
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Werner Reisacher

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Unfortunately, you are correct Lewish. All of the methods/systems are focusing mainly on cost, material, and labor - the manufacturing processes. Engineers have used this wealth of analytical data in their daily drive to continuously increase both, the productivity and the profitability of their products during decades. Today, 20 % of the workforce in the US is in manufacturing compared to 80% at the beginning of the 20th century. And productivity has increased 50 times during the same time period.
In manufacturing, we recognize that work consists of a series of processes. Each of these processes is analyzed, identical processes are consolidated and handled in competency centers, and repetitive processes are eliminated.
Managerial Accounting was invented when it became clear that the majority of the work performed in the office environment actually also consists of a series of simple processes. The myth that the tasks in the white-collar environment mainly exists of "knowledge worker activities" carrying out "intellectual and creative decision-making processes" is still today - a solid roadblock in implementing in-depth financial analytical work in an office and for that matter, warehousing. supply chain activities.
We all know how important the "aging" of Accounts Receivables are. A Credit Manager is a hero if he reduces the outstanding Receivable Balances by 7 days. (the time between the invoice being sent vs. the cash received) Does anybody even have an idea, how many days it took since the order for that shipment was received by the salesman, passed on through all the internal channels, finally reached the shipping department, and eventually shipped? And how long does it take between the warehouse signing off on the shipment and the actual invoice for the customer being printed and mailed?
This just as a beginning. When you add up all these "grey zones" in which tons of papers are filed, sorted, redistributed, signed off - under the control of the "kings" in charge of he many departmental silos you will start to understand why "sourcing parts and products in cheap labor markets at rock bottom prices" is a must to keep the sales prices to the end-user competitive. There is absolutely no flexibility of cost when it reaches the "paper jungle" of the office/supply chain part of organizations.
And yes, 1 average office clerk uses 10.000 printing papers a year, 40 % of which being destroyed within the first week. All it takes is a "paper eating bug" and the US economy would come to a screeching halt within 2 weeks.
 

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