Cost Accounting

Cost Accounting

Introduction

A cost system is a set of procedures and techniques for calculating the cost of various activities. This part focuses on the Cost Accounting job order costing of manufacturing company caterpillar Inc.

Discussion

Job order costing is usually used for products that are customized. For this, Manufacturing and Construction Company would be the best example as each job cost will be linked with the job nature. Beside this, job variance analysis is also applied in order to estimate job and its cost (Jane, 2008).

Job costing engages the calculation of costs that are involved in the manufacturing or construction of goods complete in separate batches. In order words, this process assigns costs to custom products or services. It is just like manufacturing a luxury machine or a dozen of machines of the similar design termed as batch. Here each job or batch is unique and if it is not then it is better to use process costing where allocation of both direct and overhead costs determines an average cost per unit i.e. manufacturing cost.

As caterpillar is larger manufacturing company, the best methods for them are Job Order Costing as they manufacture different types of machinery and engines and financial products. Managers at caterpillar need to know what outputs cost to produce or deliver (and what profit is earned by each main category of output). For financial accounting purposes, this is important because it is necessary to split production-related costs between cost of sales (which are expensed in the period to match the related sales) and closing stock (which is carried forward as an asset into future periods and expensed against future sales). For decision-making, this knowledge is also important because of the need to

Allocate resources and marketing efforts between product lines;

Review product ranges and decide which new products to introduce, and which existing products to retain or to abandon;

Choose between manufacturing in-house and outsourcing products or components; and

Compare an organization's costs against those of its competitors for benchmarking and cost reduction purposes.

Note that this approach tends not to distinguish between variable and fixed costs in the way that CVP does for caterpillar Inc. If a caterpillar Inc intends to make a profit by setting prices which cover all its costs, the cost behavior distinction is less important. The key distinction for this costing is between direct costs and indirect costs or “overheads” (Lawrence, 2008).

Direct and indirect costs

Direct costs are costs that can be traced directly to a product. They may be product-specific (e.g. unique materials and components, or the wages of dedicated production staff who work on only one product). They may also be traced by a process of attribution (e.g. wood used to make chairs, tables and desks can be traced to the three products based on quantities used; wages of production staff who work on all three products can be traced to the products based on records of hours worked). In both cases the traceability is highly accurate and there is unlikely to be any ...