The costing system that provides you with all the information you need to draw conclusions and implement corrective actions in a timely manner, at the lowest possible cost, is the best. There is no one fits all solutions.
You can compare the function of cost accounting with that of a meat grinder. Financial Accounting is dumping a bunch of data into the machine, the data is processed and pushed through “filters” and exactly the same amount of data is coming out, just sliced and sorted by different categories and types of data.
The simplest form of Cost accounting is the allocation of actual costs incurred to individual projects, such as a plumber installing a kitchen sink, or a car mechanic fixing engine problems.
When the time it takes to produce a “finished product” exceeds an accounting period, accumulated costs need to be temporarily capitalized as WIP by type of categories and type of costs. Under a Direct Costing Method, all direct costs (production labor, material, etc.) are capitalized, all overhead cost is expensed during that accounting period.
Under the Absorption Costing Method, both direct and indirect costs are capitalized.
Today, Standard Costing is pretty much the Standard in major Manufacturing companies. Costs are allocated to “cost centers” and from there, re-distributed to individual products. An individual production machine can be a “cost center”.The accumulated cost can be further broken down into the processes (activities) that are needed to keep that machine running. (production, changing tools, cleaning, maintenance)
The system is called “Standard Costing” since engineers and/or trained cost accountants have calculated the optimal quantities and times of material and labor that are needed to complete each process. These Standard values have the function of a “Budget”. At the end of and accounting period, cost accountants are analyzing the variances which lead them to the source where the deviations from the standards have occurred.
Activity-Based Costing is not much more than a finer tuned Standard Costing Systems. As a salesman, you want to offer customers cars in any color they want. Cost accountants know that batch processing results in optimal costs. Interrupting a batch for changing colors for one car is creating costs that go far beyond the time it takes to paint that individual car. They decided to allocate such downtime (changing color, changing tools, or molds) to a new cost center “retooling” and re-allocate these costs directly to that particular “nonstandard product” that caused the interruption. The term “Activity Based Costing” was coined.
To summarize, cost accounting is where the action is. You will actually learn more about cost accounting from engineer’s than from accountants. It is an ongoing fine-tuning of the processes that drive the quality and cost of a final product.
My favorite books that are actually not dealing with cost accounting methods but teach you all about process control are under the title KAIZEN. A method that an American introduced under a foreign aid program after WWII and resulted in the success of the Japanese Car Industry.
