Who should take this course? Are you struggling in understanding Costing concepts and techniques like Material Costing, Labour Costing, Overheads Costing, Standard Costing, Marginal Costing, Operating Costing, Contract Costing, Job Costing, Batch Costing, Process Costing, Joint Products & By-Products, Budget & Budgetary Control, Activity Based Costing? Are you a student pursuing professional courses like CA / CMA / CS / CFA /CPA / ACCA / CIMA / MBA Finance or are you a Finance Professional / Banker aspiring to excel in Costing Techniques and rise to top in your career? Then this course is for you — Cost Accounting A Comprehensive Study. Why you should take this course?
- By taking this course, you will be able to see practical side of Cost Accounting concepts with lot many case studies to solve. Approaching complex topics through case studies is the best way to understand them and you will find lot many in this course.
- If you a Professional course student in the line of Finance or Accounting, then you would have Cost Accounting will be one of your major subject. This course will explain theory and practical concepts in Cost Accounting which will help you to excel in Academic Examinations.
- If you are an Accounting or Finance or Cost Accounting Executive, this course will help you to brush up you basics in Cost Accounting and all the contents have immediate practical relevance and application.
What you will learn by taking this course? This is a comprehensive course, covering each and every topic in detail. In this course,you will learn the Cost Accounting basic concepts, theories, and techniques which deals with conceptual frame work. You will be exposed to following concepts and Techniques:
- Basics of Costing — 46+ Lectures
- Material Costing — 47+ Lectures
- Labour Costing — 24+ Lectures
- Overheads Costing — 31+ Lectures
- Standard Costing Techniques — 12+ Lectures
- Standard Costing Variances — 16+ Lectures
- Operating Costing — 5+ Lectures
- Process Costing — 8+ Lectures
- Budget and Budgetary Control — 17+ Lectures
- Marginal Costing — 26+ Lectures
- Contract Costing — 11+ Lectures
- Joint Products & By Products — 14+ Lectures
- Non Integrated Accounts — 19+ Lectures
- Job Costing and Batch Costing — 19+ Lectures
- ABC Costing -8+ Lectures
How this course is structured? This course is structured in self paced learning style. Each and every section of this course is broken down as various micro lectures and then they are substantiated with examples and case studies. Several real world examples are used in this course through case studies. You’ll gain authority on each and every topic as i take you through lectures one by one. This course is presented in simple language with examples. This course has video lectures (with writings on Black / Green Board / Note book / Talking head, etc). You would feel you are attending a real class. What are the pre-requisites for taking this course? You should have basic knowledge of Accounting. You would require good internet connection for interruption free learning process. How this course will benefit you? At the end of the course, you will be able to solve various case studies in Cost Accounting at ease with high level of confidence. This course will equip you for approaching above listed professional examinations with confidence as well hand real life problems with clarity. Happy Learning and Best Wishes!
Who this course is for:
- Cost Accounting Students and Executives
- Accounting Students and Executives
- Finance Students and Executives
- MBA Finance Students
- B.Com., BBA, CA, CMA, CS, CFA, CPA, CIMA Students
Careers as a Cost Accountant is expected to witness a massive rise between 2018 – 2028, according to the IBEF, the job opportunities as Cost Accountant will grow 6% more producing 90,000 jobs. They have also stated that the salary that is offered to Cost Accountants all across the globe is arount INR 40 LPA. There are three levels for this course — CMA Foundation, CMA Intermediate, and CMA Finals. The duration of the course varies from 8 months to 18 months. There is a 100-hour training which every student must take to complete this course.
Candidates aspiring to become a Cost Accountant can also pursue MBA in Accounting. CMA is the most commonly chosen course to become a cost accountant. It is an established fact that a Cost Accountant certified candidate gets 30% more salary than a non Cost Accountant certified candidate. India is home to several top MBA Accounting Colleges who grant admission on the basis of various Management Entrance Exams such as CAT, SNAP, XAT etc. Know More: Accounting Courses Alert: The Institute of Cost & Works Accountants of India (ICWAI) has changed its identity into The Institute of Cost Management Accountants of India (ICMAI). ICWA course has been renamed as CMA course.
The average course fee for the Foundation course is INR 4000, Intermediate Course is INR 20,000 and for CMA Final Course the fee is INR 17,000. Cost Accountants hold designations like CTO, Treasurer, CFO, Controller, VP, Finance Manager, Senior Accountant, Cost Accountant. Also Check: Cost Accountant Salary
How To Become A Cost Accountant: Quick Facts
| Industry | Cost Accounting |
| Eligibility | 10+2 with any stream (Except Arts) |
| Average Starting Salary | INR 400,000 — 50,00,000 |
| Job Opportunity | Business Firms, Banking & Financial Sector, Research And Training, Government Work. |
What Does a Cost Accountant Do
Cost Accountants are the professionals who analyse the product costs that are being made and sold by the organisation. They inspect the related costs in the production network and perform productivity examinations. Cost bookkeepers assist associations with distinguishing the items, administrations, measures or even offices that are the most or least beneficial. A portion of their particular duties include:
- Planning month to month and quarterly bookkeeping reports for accommodation to the executives
- Creating quarterly reports for senior administration dependent on a stock hold investigation
- Proposing changes to methods and approaches to expand the association’s income
- Examining authoritative information and checking on paces of work, overhead and deterioration to suggest strategy changes that will improve numbers
- Setting up the standard expenses of items and administrations and refreshing them as suitable dependent on the related costs
- Keeping up and assessing the overall record and asset reports
Know More: About Diploma in Accounting
Types Of Cost Accountants
After completing all three levels of Cost Accountant, one is offered the following types of job roles,
Cost Accountant
A Cost Accountant examines reviews and prepares final documents. They are even specialized in managing all financial aspects of a business. Cost Accountants are associated with Supply chains and profitability analysis.
| Requirement | Graduation in any stream preferably Accountancy and Finance |
| Salary in India | INR 7,00,000 |
Chief Financial Officer
The chief financial officer is the officer of a company who is in charge of the company’s finances, including financial planning, financial risk management, record-keeping, and financial reporting. CFO is also responsible for Data Analysis for the company.
| Requirement | Complete Certified Public Accountant Complete Bachelors Degree in Finance |
| Salary in India | INR 3,46,70,00 |
Financial Analyst
A Financial analyst works in a variety of industries, including banks, pension funds, insurance companies, and others. Financial analysts advise businesses and individuals on how to spend money to maximize profits.
| Requirement | 3+ years of Business Finance Relevant Experience |
| Salary in India | INR 5,00,000 |
Finance Manager
A Finance Manager is in charge of the budgeting process and assists the executive management team in creating the correct business decisions for the organization by providing insights and financial business advice.
| Requirement | Graduate with Specialisation in Finance and Business Administration |
| Salary in India | INR 8,00,000 |
Financial Risk Manager
A financial risk manager aims at identifying risks to a company’s assets, earning capacity, or achievement. His main job is to maintain the risk of the company, which will protect your company.
| Requirement | 2+ years of work experience in managing financial risks |
| Salary in India | INR 1,6000,000 |
Cost Accountants can mean different things to different organizations, but the overall job is to see the budget of the organization. The budget of the organization comprises operational costs and purchasing costs.
School Level Preparation
If a student decides to pursue a career as a cost accountant at the high school level, then they can choose any subject except fine arts. It’s not mandatory to select Mathematics Or Accounts for the entrance examination. But if you select Mathematics and Accounts it will be easier for you to clear your entrance examination and your CMA course as it is tough and requires a lot of skills and practice.
Undergraduate Preparation
Once you’ve completed your 10+2 and you’ve cleared your entrance, you’re ready for the course. If you’ve a Graduation degree you can directly apply for CMA Intermediate but if you are not a graduate then you can start from level 1, that’s CMA Foundation. The length of time it takes to complete the CMA program is determined by the level, of course, you take up.
Courses to Become a Cost Accountant
The reputed certification of Cost & Management Accountant or the Cost Accountant is given by the Institute of Cost Accountant of India. Earlier, known as Cost and Works Accountant of India is now widely known as Institute of Cost Management Accountant. There is no technical difference between ICWA and CMA.
CMA
Their CMA course is conducted in three levels as CMA Foundation, CMA Intermediate and CMA Final. Admissions in CMA can be done directly to Intermediate courses if the candidate is a graduate. If the candidate is a school pass out that is 10+2 pass out then they can take admission in the foundation course. CMA exams are conducted twice a year mainly in June and December.
CMA Course Details
| Level Name | Eligibility | Course Fee |
|---|---|---|
| CMA Foundation | Candidates must have qualified 10+2 Graduates can directly apply for CMA Intermediate. | INR 4000 |
| CMA Intermediate | Students must have passed 10+2 They must have completed CMA Foundation Course Candidates who have qualified ICSI Foundation or ICAI Intermediate can apply for this course Applicants will have to complete CSS for 3 days and Computer Training for 100 hours. | INR 20,000 |
| CMA Final | Candidates who have passed CMA intermediate can apply | INR 17,000 |
| Training During CMA Intermediate Course Computer Training — 100hours Communication and Soft Skill Training — 3 days | ||
| Training During CMA Final Course Industry Oriented Training Program — 7 days Practical Training — 15th Months | ||
CMA 2022 Important Dates
| Events | Dates for June Batch | Dates for December Batch |
|---|---|---|
| Foundation Course Admission | 31st January 2022 | 31st July 2022 |
| Registration for Intermediate and Final | 31st January 2022 | 31st July 2022 |
| Revalidation of Coaching | 15th March 2022 | 15th September 2022 |
| Completion of Coaching | 31st March 2022 | 31st September 2022 |
| Examination Form Filling | 10th April 2022 | 10th October 2022 |
| Declaration of Result | 23rd August 2022 | 21st february 2022 |
Related Courses to Become a Cost Accountant
Besides the professional course of CMA, students can also pursue the following courses in Accounting.
BBA in Accounting
This course is a mixture of both finance and business, where students are taught about auditing, making financial reports and accounting. BBA in Accounting are experts in analysing data and making business decisions.
| Particulars | Details |
|---|---|
| Duration | 3 years. |
| Eligibility | 10+2 (with Maths preferred) |
| Average Course Fee | INR 90,000 to INR 5,00,000 |
| Average Starting Salary | INR 2,00,000 to INR 5,00,000 |
BSc Accountancy
BSc in Accountancy is related to analysis of various provisions and information of the business or the organisation. Their job role includes resource allocation, decision making and expertise in accounting.
| Particulars | Details |
|---|---|
| Duration | 3 Years |
| Eligibility | 10+2 with minimum 50% |
| Average Course Fee | INR 20,000 to INR 4,00,000 |
| Average Starting Salary | INR 3,00,000 to 10,00,000 |
BA in Accountancy
BA in Accountancy can be pursued by students who had Humanities, Science or Commerce in their higher secondary education. However it is mandatory that the students have studied subjects like Accountancy, Finance, and Business studies.
| Particulars | Details |
|---|---|
| Duration | 3 years |
| Eligibility | 10+2 with minimum 50% |
| Average Course Fee | INR 70,000 to INR 3,00,000 |
| Average Starting Salary | INR 3,00,000 to INR 10,00,000 |
BCom in Accountancy
Students who wish to do higher studies in Accountancy such as Masters in Accountancy must do BCom in Accountancy. BCom in Accountancy helps the student to get clarity in money, business and management.
| Particulars | Details |
|---|---|
| Duration | 3 years |
| Eligibility | 10+2 with minimum 50% |
| Average Course Fee | INR 20,000 — INR 5,00,000 |
| Average Starting Salary | INR 2,00,000 — INR 10,00,000 |
MCom in Accounting
After doing BA in Accounting, BSc in Accounting, BCom in Accounting, students can pursue higher studies inMCom in Accounting. Students who have the basic knowledge about accounting and finance can pursue this course to be proficient.
| Particulars | Details |
|---|---|
| Duration | 2 years |
| Eligibility | Minimum score of 50% (Relaxable for reserved category students) marks at graduation level |
| Average Course Fee | Between INR 8,000 to 2.25 Lacs |
| Average Starting Salary | INR 15,000 to 19,000 |
MBA in Accounting
This course is specially designed for the students who have done BBA in Accounting. MBA accounting is a highly technical course.
| Particulars | Details |
|---|---|
| Duration | 2 years |
| Eligibility | Bachelor’s degree in any field with a minimum of 50% aggregate |
| Average Course Fee | INR 4,00,000 — INR 15,00,000 |
| Average Starting Salary | INR 8,00,000 — INR 25,00,000 |
How Much Does it Cost to Become an Accountant
Here are some of the colleges that offer Cost Accountant courses and other relevant courses. To know how much does it cost to become an accountant, follow the table given below,
How To Become A Cost Accountant In Abroad
Apart from India, CMA (Certified Management Accountant) courses are available in many countries such as The United States, Canada, the Middle East, and Africa.
Education Requirements —
- A Bachelor’s degree in Accounting is required for an entry-level position as a Cost Accountant, and a Master’s degree or a Master of Business Administration (MBA) with a focus in accounting is considered necessary for advanced positions.
- A Bachelor’s degree is typically completed in four years.
- In comparison to India, you can complete your CMA (US) (Certified Management Accountant) exams in 6–9 months.
- There are only two exams that you must clear.
- You will require professional assistance, which you can obtain from IPFC Academy, which is the leader in CMA (US) training.
Cost Accountant in UK
There are three levels of Cost Accountant in the UK and all three courses are conducted in computer based objective test and case study.
Operational Level: After completion of this course students will get CIMA Diploma degree in Management Accounting.
Management level: Candidates must have qualified operational level. After completion of this course students will get CIMA Diploma degree in Management Accounting.
Strategic level: Candidates must have completed Operational Level and Management Level. After completion of this course students will become Associate Chartered Management Accountant.
Cost Accountant in Australia
The Cost Accounting courses offered in Australia are in 2 level,
Professional Level
- Degree in Accounting, Commerce or Finance
- Professional Qualification in Accounting
- Degree in Business related field
Technician Level
- Degree in any field apart from accounting
- Advanced Diploma in Accounting
- Degree in Accounting, Commerce or Finance
- Qualified in Management Accountancy
Benefits Of Career As A Cost Accountant
The benefits of career as a Cost Accountant is relatively higher than any other profession. One gets the opportunity for advancement, competitive salary in the market, and will grow in depth knowledge about tax and business law.
Competitive Salary
A Cost Accountant with less than 5 years of experience can expect to earn around 4 LPA, while a mid-career employee can expect to earn around 6 LPA, An experienced Cost Accountant can expect to earn around 9-10 LPA. The salary is primarily determined by the company and the individual.
Job Security
A large portion of accounting work is digitized, which means it can be done online, from anywhere.If they want better income they can work abroad or they can stay in India and work online. If the candidate is experienced and proficient in his job then there is barely any chance of job-loss.
Positive Impact Of Cost Accountant
Due to the specialised education and skills of CMA, CMAs may hold top management positions in both the government and industry, such as Chairman and Managing Director, Managing Director, Finance Director, Financial Controller, Chief Financial Officer, and Cost Controller and many more roles.
Experience
Every time you work as a cost accountant, you can gain a lot of experience; it’s a continuous learning process; every time you learn a strategy, a new technique, a new method, you can gain a lot of knowledge.
Is Cost Accounting a Good Career
Cost accountants are in high demand in the government, private, banking, and finance sectors, development agencies, education, training, and research, as well as the service and public utility sectors.
Do Accountants Make a lot of Money
Accountants can earn a good living depending on their location and job type; the median annual wage for an accountant in May 2020 was $73,560. Finance and insurance, management of companies and enterprises, tax preparation, and government are among the highest-paying industries for accountants.
What is the Highest-Paid Accountant
- Chief Financial Officer (CFO) Salary Range on Glassdoor: INR 60,000 – INR 70,000 Controller. Salary Range on Glassdoor: $78,000 – $155,000
- Director of Accounting Salary Range on Glassdoor: INR 88,000 – INR174,000
- Senior Accountant Tax Accountant Accounts Payable Specialist Finance Manager
What is the Role of a Cost Accountant
Cost accountants assist in the planning, budgeting, and monitoring of performance, as well as the establishment of standard unit costs and the recommendation of appropriate cost-cutting opportunities. The role is critical in determining where a company’s money is being spent as well as which products, departments, or services are the most profitable.
What is the Five Main Purpose of Cost Accounting
The following are the primary goals of cost accounting:
- Cost determination
- Selling price determination
- Cost control and cost reduction
- Determining the profit of each activity
- Assisting management in decision-making.
How Many Years Does it Take to Become a Cost Accountant
A Bachelor’s degree in Accounting is required for an entry-level position as a Cost Accountant, and a Master’s degree or a Master of Business Administration (MBA) with a focus in accounting is required for advanced positions. A Bachelor’s degree is typically completed in four years.
Top Recruiters for CMA (Certified Management Accountant) Course
Almost all the top Companies in India hire Cost Accountant but the most reputed ones are:
| ITC Tobacco Division | ITC Food Division | ITC Hotels |
| L&T Constructions | Wipro | Amazon |
| Nestle | Power Grid Corporation on India | Vedanta Limited |
| Cipla Ltd. | Bharat Electronics Ltd. | Galaxy Surfactants |
Salary Of A Cost Accountant In India
The salary of Cost Accountants in both private and Government Organisation is high. Here we have collected the average salary for Cost Accountants basis Specialisation, Experience and Gender.
Average Annual Salary
| Type | Average Annual Salary |
|---|---|
| Government Organization | INR 9 – 10 L |
| Private Organization | INR 6 – 10 L |
Specialization Wise
| Specialization | Average Annual Salary |
|---|---|
| Banking Manager | INR 4 – 8 L |
| Investment Banker | INR 2 – 4 L |
| Investment Analyst | INR 2 – 3 L |
| Cost Accountant | INR 4 L |
| Chief Financial Officer (CFO) | INR 7 L |
Gender Wise
| Gender | Average Annual Salary |
|---|---|
| Female | INR 4 L |
| Male | INR 4 L |
Experience Wise
| Years | Average Annual Salary |
|---|---|
| 1-4 Years | INR 4.17 L |
| 5-9 Years | INR 6.12 L |
| 10-19 Years | INR 9.83 L |
| 20 + Years | INR 16 L |
Job Role Wise
| Job Roles for Cost Accountant | Average Annual Salary |
|---|---|
| Accounting and Auditing Clerk | INR 2.5 L |
| Forensic Accountant | INR 4.5 L |
| Chief Accounting Officer | INR 3.5 L |
| Investment Analyst | INR 2.5 L |
| Audit Manager | INR 5 L |
| Personal Finance Consultant | INR 3.25 L |
| Economic Officer | INR 5.82 L |
| Investment Banker | INR 2.92 L |
| Banking Manager | INR 4 L |
How To Become A Cost Accountant: FAQs
Ques. Can I appear for CMA (Certified Management Accountant) Intermediate before completing graduation? Ans. You can register for the exam but not take it because to be eligible for CMA Intermediate the candidate shall complete his graduation or CMA FOUNDATION. Ques. What is the syllabus of CMA (Certified Management Accountant) Foundation? Ans. Paper 1: Fundamentals of Economics and Management Paper 2: Fundamentals of Accounting Paper 3: Fundamentals of Laws and Ethics Paper 4: Fundamentals of Business Mathematics & Statistic. Ques. What is the syllabus of CMA (Certified Management Accountant) Intermediate? Ans. Paper 5: Financial Accounting
Paper 6: Laws, Ethics and Governance
Paper 7: Direct Taxation
Paper 8: Cost accounting and financial management
Paper 9: Operation Management Information System
Paper 10: Cost and Management Accounting
Paper 11: Indirect Taxation
Paper 12: Company Accounts & Audit Ques. What is the syllabus of CMA (Certified Management Accountant) Final? Ans. Paper 13: Corporate Laws and Compliance
Paper 14: Advanced Financial Management
Paper 15: Business Strategy & Strategic Cost Management
Paper 16: Tax Management and Practice
Paper 17: Strategic Performance Management
Paper 18: Corporate Financial Reporting
Paper 19: Cost and Management Audit
Paper 20: Financial Analysis & Business Valuation Ques. When can I apply for CMA (Certified Management Accountant) course? Ans. You can apply for CMA course once you’ve completed your 10+2 from a recognised board/University. Ques. Should I have an accounts background to appear for the entrance examination? Ans. No, it’s not necessary for you to be from an accounts background to apply for the entrance examination. You can be from any field except Fine Arts. Ques. Is it compulsory for me to take mathematics to apply for entrance examination? Ans. No, it’s not necessary for you to take mathematics to apply for the entrance examination. You can be from any stream except Fine Arts. Ques. Can I apply for CMA (Certified Management Accountant) course if I’m from Science stream? Ans. Yes, you can apply for the course even if you’re from Science Background. Ques. How many levels are there in CMA (Certified Management Accountant) course? Ans. There are total number of 3 Level’s to complete the course.
Level 1 — CMA FOUNDATION
Level 2 — CMA INTERMEDIATE
Level 3 — CMA FINAL’S. Ques. Is it difficult to clear all the levels of CMA (Certified Management Accountant) Course? Ans. Yes, it’s difficult to clear the examination. Not alot of people can clear it on their first attempt. The pass rate is around 1-2% only. But if you study well and focus on your studies you can clear it out in your first attempt. Cost accounting is a valuable tool you use to reduce and eliminate costs in a business. You also use cost accounting to determine a price for your product or service that will allow you to earn a reasonable profit. Familiarize yourself with the most important formulas, terms, and principles you need to know to apply cost accounting. You’ll also want to get the scoop on text-taking strategies for cost accounting students.
Must-know formulas for cost accounting
To reduce and eliminate costs in a business, you need to know the formulas that are most often used in cost accounting. When you understand and use these foundational formulas, you’ll be able to analyze a product’s price and increase profits.
Breakeven Formula
Profit ($0) = sales – variable costs – fixed costs
Target Net Income
Target net income = sales – variable costs – fixed costs
Gross Margin
Gross margin = sale price – cost of sales (material and labor)
Contribution Margin
Contribution margin = sales – variable costs
Pre-Tax Dollars Needed for Purchase
Pre-tax dollars needed for purchase = cost of item ÷ (1 – tax rate)
Price Variance
Price variance = (actual price – budgeted price) × (actual units sold)
Efficiency Variance
Efficiency variance = (Actual quantity – budgeted quantity) × (standard price or rate)
Variable Overhead Variance
Variable overhead variance = spending variance + efficiency variance
Ending Inventory
Ending inventory = beginning inventory + purchases – cost of sales
Important terms and principles cost accountants should know
Many accountants will tell you that cost accounting is the most difficult accounting subject to learn. That’s because cost accounting has many terms that are not used in other areas of accounting (financial accounting and management accounting, to name a few). If you’re looking for an overview of the most important terms and principles for this subject, you’ve found it! These concepts provide a foundation for learning cost accounting.
Reviewing accounting basics
Accountants use many principles to guide their decision-making process, such as the matching principle and the principle of conservatism.
- Matching principle: This principle states that your company’s revenue should be matched with the expenses that relate to that revenue. If you sell lamps in May, you create revenue for that month. The May revenue should be matched with the expenses you incurred for the lamps sold in May. So, the cost of the lamp is matched with the sales proceeds for the lamp’s sale.
- Principle of conservatism: Accountants often need to make judgments. Conservatism means that the decision should generate the least attractive financial result. If there’s a decision about revenue, the conservative choice is to delay recognizing revenue in the financial statements. Expenses should be posted to the financial statements sooner rather than later. These choices generate financial statements that are less optimistic, which is why the approach is called conservative.
There are four basic types of cost that accountants need to keep in mind — direct, indirect, fixed, and variable costs. They are defined as follows:
- Direct costs: Direct costs can be directly traced to the product. Material and labor costs are good examples.
- Indirect costs: These can’t be directly traced to the product; instead, these costs are allocated, based on some level of activity. For example, overhead costs are considered indirect costs.
- Fixed costs: Fixed costs don’t vary with the level of production. A good example is a lease on a building.
- Variable costs: Unlike fixed costs, variable costs change with the level of production. For example, material used in production is a variable cost.
Every cost can be defined with two of these four costs. For example, the cost to repair machinery is an indirect variable cost. You decide if the cost is direct or indirect, and if the cost is fixed or variable.
Checking out cost accounting basics
Just like in any discipline, you use specific cost accounting terms and ideas to communicate meaning and understand procedures. Understanding basic concepts in crucial, so to start using cost accounting analysis, you should be familiar with these terms:
- Contribution margin: This term is defined as sales minus variable cost. When you subtract your fixed costs from contribution margin, the amount left over is your profit.
- Breakeven point formula: The breakeven point is the level of sales where your profit is zero. The breakeven formula is sales minus variable cost minus fixed cost. You multiply your sales per unit by units sold. You also multiply the variable cost per unit by the same units sold. The sales level that makes the formula equal to zero is the breakeven point.
- Relevant range: Relevant range is a term that relates to machinery, equipment, or vehicles in your business. Think of relevant range as the maximum level of use for the item you operate in your business. Say you use a sewing machine. As long as you operate the machine at or below the relevant range, it should operate normally. The machine’s cost should come in at the level you expect. If you operate above the relevant range, the machine won’t operate as you expect. You need to invest in a second machine to operate above the relevant range.
Digging deeper into cost accounting analysis
As you further your study, you use more complex cost analysis tools. From job costing to variances, the more involved the job, the more involved your cost accounting tools become. Here are some important tools you’ll use:
- Job costing: This method of costing assumes that every customer job is different. Plumbers and carpenters are good examples of businesses that use cost accounting. Because every job is different, each customer job is assigned material, labor, and overhead costs.
- Process costing: Companies use process costing when partially completed units are moved from one production area to another. Process costing assumes that the products you produce are similar or even identical.
- Activity-based costing (ABC): ABC costing can be used for both job costing and process costing analysis. You use ABC costing to assign costs to your product more specifically. ABC costing analyzes the activities that cause you to incur costs; you then connect the cost to the activity.
- Variance: A variance is a difference between your planned or budgeted cost and your actual results. A favorable variance occurs when your actual costs are less than your budgeted or planned cost. An unfavorable variance is when actual costs are higher than planned.
- Inventoriable costs: These are costs that are directly related to the product. Production costs are inventoriable costs for a manufacturer. If you are a retailer, your cost to purchase inventory is also an inventoriable. Other costs you incur for goods are included, such as shipping and storage costs.
Avoiding pitfalls on cost accounting exams
Cost accounting is a great tool to improve the profitability in any business. It’s a critical subject that accounting students need to learn to be successful in their careers. However, some cost accounting concepts are easily misunderstood and therefore difficult to address correctly on exams. These test-taking strategies will help you succeed on a cost accounting exam by clarifying what is truly being asked in each question. Read the last sentence first. Cost accounting questions often provide lots of data, but not all of that information is needed to answer the question. Test item writers refer to that data as distractors. If you start at the top and read down, you read a lot of unneeded data. Read the last sentence first. That strategy gets you to what the question is truly asking. Then you can read the rest of the question — and pull out only the data you need to answer the question.
- Absorption costing vs. variable costing: The only difference between these two costing methods is how they address fixed manufacturing costs. A typical question on this topic lists variable manufacturing costs, or fixed selling and administrative costs. Don’t be fooled! Absorption and variable costing treat these other costs in the same way, so ignore them.
- Favorable vs. unfavorable variances: Of course, the word favorable means better or preferred. However, in cost accounting, favorable has a different meaning, depending on whether you’re talking about a cost or revenue. Less actual costs than budgeted is a favorable variance. However, more actual revenue than planned is a favorable variance. In both cases, your actual profit is more than planned. Unfavorable variances are the reverse: More actual costs and less actual revenue is unfavorable.
- Production costs: Many cost accounting questions relate to production of a physical product (rather than a service). Make sure you’re clear on whether the question is asking about units of a product, or an amount of material needed per unit. For example, one bicycle (one unit) requires two wheels. Be clear on which item (units or wheels) you’re using when you calculate costs.
- Total fixed costs vs. fixed costs per unit: Some cost accounting questions provide you with a fixed cost per unit. If you determine that you need fixed costs to answer the question, pause for a minute. Try to find total fixed costs in the question and use that number. Fixed costs per unit should be avoided. That’s because, at some point, you sell enough to cover your costs. As a result, the additional units you produce don’t have any fixed costs attached to them. Fixed cost per unit is misleading.
- Process costing: Process costing questions often address how costs move from one production department to another. Keep in mind that, almost always, material costs are put into production before labor costs. If you’re making leather baseball gloves, you need material (leather) in production before you can do anything to it (cut, sew, treat the leather, and so on). If you keep that in mind, computing material and labor costs may be easier.
About This Article
This article is from the book:
- Cost Accounting For Dummies ,
About the book author:
Kenneth W. Boyd has 30 years of experience in accounting and financial services. He is a four-time Dummies book author, a blogger, and a video host on accounting and finance topics.
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