Functional-Based Cost Accounting Basics

Functional-based cost accounting, also called cost accounting or management accounting, enables manufacturers to evaluate the operating performance of their activities. This financial discipline also indicates to production foremen whether corporate manufacturing mechanisms are efficient. Management accounting is an important tool in corporate decision-making processes, especially when it comes to setting blockbuster products apart from nonperforming items.

Role in Corporate Decision-Making

Cost accounting helps top management ensure that the company's priorities are in sync with trends in the industry, especially when comparing corporate strategies with rivals' tactics. Senior leadership relies on management accountants to provide the guidance necessary to rein in waste.

The Cost Function

In the corporate setting, the cost function involves various factors, including labor, factory overhead and materials. Factory overhead consists of fixed production costs, such as utilities and rent. Variable costs include salaries and costs of finished goods.

Cost-Volume-Profit Analysis

Cost-volume-profit, or CVP, analysis enables companies to produce goods at low costs, ensuring that the cost per item decreases as volume goes up. In other words, manufacturers engineer CVP plans to keep costs down and reap substantial profits when demand increases.

Job Costing

Job costing helps a company monitor actual expenses associated with a specific job or project and compare them with forecasted costs. Actual expenses include salaries, equipment maintenance, spoilage and utilities. Spoilage, also called waste, refers to the cost of unprofitable materials that a manufacturer can't charge to clients.

Process Costing

Process costing enables a firm to allocate costs to a large batch of products, which might include an entire month's production. Unlike job costing, these costs relate to a manufacturing process, including all steps from product conception to completion.

Activity-Based Costing

Activity-based costing is a process through which a manufacturer assigns production costs to specific activities necessary in the production process. These activities include early-stage production, delivery and maintenance.

Support Department Costs

In the corporate context, support department costs include all expenses associated with nonmanufacturing processes. These may be human resources, compliance and legal, financial accounting, treasury, sales and marketing, information technology and corporate security.

Joint Product and By-Product Costing

Joint product costing enables companies to evaluate costs associated with one or more products that come out of a single production process. By-product costing helps manufacturers gauge the costs of secondary or incidental products deriving from a single production process.

Static and Flexible Budgets

A static budget, unlike a flexible budget, is a forecast report that department heads don't adjust or alter regardless of changes in volume or other conditions during the budget period.

Standard Costs and Variance Analysis

Manufacturers use a standard or specified cost as the basis for measurement against an actual cost. Variances are differences between actual costs and standard expenses. A positive variance means that specified costs exceed actual costs and is the preferred outcome.

References

• Wiley: Cost Accounting
• The Manager: Finance/Accounting --- Activity-Based Costing (ABC)
• College-Cram: Variable Costs
• Iowa State University: Fixed and Variable Costs
• Federal Accounting Standards Advisory Board: Statement #4/Managerial Cost Accounting Concepts and Standards for the Federal Government
• Future Accountant: CWA ICWA Intermediate: Group II --- Cost and Management Accounting