Fundamentals of Cost Accounting Study Set 4

Business

Quiz 6 :
Fundamentals of Product and Service Costing

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Quiz 6 :
Fundamentals of Product and Service Costing

Cost accounting system It is a system designed to report the cost of products and services. Material, labor and overhead costs are allocated to determine unit costs. Cost accounting system comprises of various types of formats, forms, procedures, reports and records. This can be maintained independently and can be part of formal accounting system also. Cost accounting systems are used by both manufacturing and service firms to find the unit costing of their products or service. There are two types of cost accounting systems like job order costing system used for personalized products or services and process costing system used for large size of identical products. Some companies may use combination of job order costing and process costing system to fit its needs. Relationship - Cost allocation and product costing Product costing is based on number of factors and includes many cost components like direct material, direct labor, overheads, indirect costs etc. It is easy to calculate the cost of product if components of the products are directly used and not shared like direct labor is not shared resource. It becomes difficult to allocate the cost of common resources like depreciation on machine or rent of warehouse building which is used for two products manufacturing. Role of cost allocation comes into play when common cost needs to allocate to two or more products or departments. There different basis used for cost allocation like number units used, labors hours, area used by departments or products etc. Cost allocation is very important to determine the correct product cost and keep all departments satisfied with cost allocated. Hence, cost allocation and product costing are interrelated with each other.

The main objective of the cost management system emphases the relevant information about the services rendered by them and goods sold by them. A cost management system which is well design gathers and report cost that are relevant to the decision that managers make. These well design cost management system includes costs associated to meet the needs of the customers, serve the customers with quality measures and comply with the tax authorities. The three criteria for the design of the cost management systems are listed as follows. 1. Costs associated to meet the needs of the customers. 2. Serve the customers with quality measures. 3. Comply with the tax authorities.

Cost accounting system It is a system designed to report the cost of products and services. Material, labor and overhead costs are allocated to determine unit costs. Cost accounting system comprises of various types of formats, forms, procedures, reports and records. This can be maintained independently and can be part of formal accounting system also. Cost accounting systems are used by both manufacturing and service firms to find the unit costing of their products or service. There are two types of cost accounting systems like job order costing system used for personalized products or services and process costing system used for large size of identical products. Some companies may use combination of job order costing and process costing system to fit its particular needs. Cost flow diagram Cost flow diagram are used to explain the relationship between the cost pools and cost objects i.e. products. It shows the flow of resources from cost pools to products. This diagram helps to under the product costing process which is shown by highlighting all cost pools like direct material, direct labor, overhead used etc., cost allocation basis and products manufactured. It makes easy and simple to understand the flow of costing process. It also helps in understanding the different types of cost pools used for the resources and their allocations basis to products. Like, direct material or direct labor is a cost pool which is allocated directly to products on the basis of its usage. Overhead cost may be allocated to products on the basis of number of units produced etc.