Cost Accounting Methods

Cost Accounting methods that companies use are usually determined by the product that is made or the service that is rendered.

What types of cost methods are there?

Standard cost accounting involves keeping the material, labor and burden costs the same for the entire year. Any costs that are more or less than the standard costs are recorded as cost variances.

ABC cost accounting or activity based costing, tries to allocate costs to a product or services based on the activities that go into the product or service. For example, Human Resource department costs may be allocated to a part based on the total number of employees involved in making the part. This makes sense because the more employees there are, the more time Human Resources will need.

Which cost accounting method to use?

Job Order Costing is usually used for large projects. The costs associated with the project are kept separate and accumulated. Examples of uses for this type of accounting are airplane manufacturers and law offices.

The method of accounting used in a particular firm will depend on the type of product or service, the amount management is willing to spend on a cost system and the requirements of the management.

Most companies use standard cost. It is the least expensive to implement and maintain, and can give reasonably accurate costs. However, it is not the most accurate system because burden is allocated as percentage of direct labor or machine time.

ABC costing can be much more accurate than standard costing, but can also be more expensive to implement and maintain. A good ABC system will have the actual costs for direct and indirect labor in the product. This is achieved by employees recording actual time spent working on the product. Cost drivers or activities are used to allocate burden costs, rather than using percentages.