During the industrial ere, businesses began to expand and the need for a system for tracking expenses and pricing was realized. Since then both costing and cost accounting have become an essential business practice.
A system of recording and determining prices of production process and products became common. The modern term for the same is called cost accounting. Costing is a process imperative to cost accounting.
Costing vs Cost Accounting
The main difference between costing and cost accounting is that costing is the process of recognizing the cost of a product or service whereas cost accounting is a mechanism of analysing expenditure for a business.
Costing is essentially the process of asserting the prices and costs of products. It is a system of determining internal financial functioning. Cost accounting, on the other hand, is a branch of accounting that determines the expenses incurred within a venture, through recording, analysing and predicting cost data, and issues statements for the same.
Comparison Table Between Costing and Cost Accounting (in Tabular Form)
| Parameter of Comparison | Costing | Cost Accounting |
|---|---|---|
| Definition | A method used to determine the sot of a product or a service at any given time | A mechanism of accounting, analysing and interpreting costing data |
| Meaning | Process or technique | Branch of accounting |
| Importance | It is not used for decision making | It is an important tool for management to determine future planning and budgets. |
| Principles | Does not use accounting principles | Application of accounting principles is important. |
| Scope | Narrow | Wide |
What is Costing?
Costing is a process that functions within a system of assigning costs to products and services in a business. Fundamentally costing involves assigning costs for customers, employees, processes, distribution channels and even subsidiaries.
The process of costing is not static. It often involves ‘variable cost’. Such costs change with regard to things such as market activity, customer response etc. This method is also known as direct costing. A good example of such costing is the costing of electronics. The price of products changes in response to other upcoming technologies.
Other forms of costing include absorption costing, such costs remain the same, irrespective of other factors. The assigned cost is hence fixed. for example, insurance and renting costs.
The process of costing involves determining the value of a product by calculating and adding the production cost. This also applies to services in a business.
Costing become even more relevant for businesses which manage large scale production, Costing in such cases involves determining all expenses of the company that are involved in the process of production. This involves identifying labour costs, direct costs and other overheads. The cost per unit will depend on these expenses.
There are two main purposes of costing;
- Internal Report: Costing enables the management to identity unnecessary expenses and divide methods to increase profitability.
- External Report: The cost allocation system enables the recording of all costs within the companies balance sheet. It is essential to maintain such an inventory.
Assigning of costs can be done via job costing, process costing and or standard costing.
What is Cost Accounting?
Cost accounting refers to the process in which all company expenses are recognized with the purpose of maintaining cost efficiency. It is a business practice that enables strategic planning and target management, by providing transparent visibility of cost information.
The process of cost accounting includes determining the amount of money spent on services products and processes in an organisation. It further involves the classification of expenses for analysis. The objects of cost accounting include determining the cost of per uni produced, analyse the cost of operations and processes, identifying sources of wastage and minimizing unnecessary expense, determining maximum profitability.
Additionally, cost accounting provides a reliable system of cost audit, to prevent fraudulent errors. This further gives out reliable information to management and operatives. The management utilises this information to design cost reduction programmes and plan better budgetary controls.
Cost accounting helps in improving the efficiency by identifying and fixing prices of activities within the venture. It further enables in determining the stock requirements and for the future, preventing situating like overstocking and understocking. All these measures collectively aid in better planning and plugging losses.
Cost accounting is also known as managerial accounting. It is an important tool for management, to understand current control and plan the future endeavours of a business. Elements of cost accounting include materials inventory, labour and overheads. Cost accounting is a regulatory process, that controls all pricing and costing related activities and determines expenses and profitability.
Main Differences Between Costing and Cost Accounting
- Costing refers to the method of calculating the cost of a product or service at a given point, while cost accounting is a mechanism of recording, analysing and interpreting the expenses occurred by a company for a certain production period.
- Costing is a technique of asserting costs while cost accounting is a branch of accounting that costing, application and computation.
- Costing deals with determining, reducing or controlling the cost of products or production per unit, while cost accounting, collects data that can be used by the management of a company to understand and forecast profitability and plan future budgeting.
- Costing does not apply the core principles of accounting while cost accounting is based on the application of these principles.
- Costing is a part of cost accounting, while cost accounting itself involves many other mechanisms. Cost accounting is not confined to just costing.
Conclusion
A business involves various activities that help in maintaining it. Tracking of expenses and controlling pricing became imperative for ventures. Costing and accounting techniques enables companies to check on production costs and overall expenses.
Costing is a process limited to defining the cost of the product as per the production unit expenses. Cost account is a broader branch in accounting that takes care of all expenses that a venture incurs during the process of production. It is an essential tool for management, as it helps in regulating recording expenditure.
References
- https://doc1.bibliothek.li/aaw/FLMF019840.pdf
- https://www.cfoconsult.nl/wp-content/uploads/2012/10/ABC-support-document_Study-Unit-2.pdf