Understanding Key Concepts in Cost Accounting: Cost Behaviour, Schedule of Cost of Goods Manufactured and Job-Order Costing Method
The history of accounting can be traced back thousands of years, to the exchange of goods and services between individuals, even before the invention of currency. People needed to record their assets, liabilities, income, expenses, etc. Two of the main branches of accounting are cost accounting or managerial accounting and financial accounting. Financial accounting is all about presenting financial information to third parties that are interested in it. On the other hand, managerial accounting has to do with providing information to the company's executives in order to make decisions. For example, products must be assigned a price. But how do we decide on this price? In this regard, one important factor is the estimation of the cost of goods manufactured.
The large-scale enterprises brought about by the Industrial revolution, and the complexity of their operations, led to the development of cost recording and monitoring systems. It is around this time that we see cost accounting formally developed. In practice we have various costing methods, such as job-order costing and process costing. Each of these methods is applied in different production and decision-making environments. For example, process costing is applied when we have mass production (on a large scale) of identical products. In this case, the cost per unit is identical for all products. On the other hand, job-order costing applies to a small scale of orders where the products produced are not the same across different orders. Therefore, in this case, the cost per unit is different for each order. This article explains basic cost behaviour and focuses on job-order costing, which applies to small manufacturing companies or cooperatives.
