Cost Accounting Montana

An accountant who keeps records of the costs of production and distribution.

or

Cost accounting is the process of tracking, recording and analyzing costs associated with the activity of an organization, where cost is defined as 'required time or resources'. Costs are measured in units of currency by convention.

There are now at least three approaches: standard costing, activity-based costing (discussed here), and throughput accounting.

A cost that remains constant, regardless of any change in a company's activity.

A good example is a lease payment. If you are leasing a building at $2,000 per month, then you will pay that amount each month, no matter how well or how poorly the business is doing.

Costs were originally considered fixed (the term comes from a Latin root meaning "constant"). In larger organizations, some costs tend to remain the same even during busy periods, while others rise and fall with volume of work. A more convenient way of categorizing these costs is to define them as either fixed or variable. Fixed costs were associated with the business administration, and did not change during quiet or busy times. Variable costs were associated with productive work, and naturally rose and fell with business activity.

In the early twentieth century, as organizations began getting more complex, managers needed a simple way to make decisions about products and pricing. Since most costs at the time were variable, managers could simply total the variable costs for a product and use this as a rough guide for decision-making.

For example: In order to make a railway coach a company needed to buy $60 in raw materials and components, and pay 6 laborers $40 each: total variable costs of $300. If managers knew that making a coach required spending $300, then they couldn't sell below that level without losing money. Any price above $300 became a contribution to the fixed costs of the company (say $1000 per month for rent, insurance and owner's salary). So the company could sell 5 coaches for $3000 or 10 coaches for $4500 and make a profit of $1500 in both cases.

Kimberly A. Somers, EA

(406) 522-8500
24 S. Willson Ave, Suite 7
Bozeman, MT