Introduction to Cost Accounting

Cost accounting is mainly for internal use
➛ True

Financial accounting focuses on cost control
➛ False
Financial accounting focuses on reporting, not cost control.

Direct costs can be easily traced to products
➛ True

Fixed costs change with production
➛ False
Fixed costs remain constant regardless of output.

1. Costs that change with production are called variable costs

2. Costs that remain constant are called fixed costs

3. Indirect costs are also known as overhead

4. Cost accounting helps in cost control

Classify each as Direct/Indirect and Fixed/Variable

➛ Raw materials
➛ Factory rent
➛ Machine electricity | based on usage
➛ Supervisor salary

A furniture company produces chairs.

Costs include
➛ Wood
➛ Carpenter wages
➛ Factory rent
➛ Electricity

Tasks
➛ Identify direct and indirect costs
➛ Identify fixed and variable costs

Direct Costs
➛ Wood
➛ Carpenter wages

Indirect Costs
➛ Factory rent
➛ Electricity

Variable Costs
➛ Wood
➛ Carpenter wages
➛ Electricity | if usage-based

Fixed Costs
➛ Factory rent

A company struggles with rising production costs and declining profits.

Questions

How can cost accounting help?
➛ It helps identify cost drivers, control expenses, and improve efficiency.

What type of costs should management analyze first?
➛ Variable costs and major cost drivers | e.g., materials, labor

How can cost classification improve decision-making?
➛ It helps managers understand which costs can be controlled and how they behave.

Give one strategy to reduce costs
➛ Reduce waste, negotiate supplier prices, improve efficiency, or optimize production.

What is cost accounting?
➛ The process of recording, analyzing, and controlling production costs.

Name two types of costs
➛ Direct and indirect / Fixed and variable

What is a fixed cost?
➛ A cost that does not change with production level.

What is overhead?
➛ Indirect costs that cannot be directly traced to a product.

Why is cost accounting important?
➛ It helps control costs, set prices, and improve profitability.

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Job Order Costing ➧ Here