Frequently Asked Question
Two Types of Cost Accounting Systems FAQS
1. What Is Cost Accounting?
Cost accounting is the branch of managerial accounting that analytically assists managers in the internal balancing of spending and profits, as well as assessing operational costs and budget analyses.
2. What is Direct Costs?
Direct costs represent any cost related to the production of goods or services. Raw materials, labor and manufacturing overhead are primary direct costs. Raw material costs contain the physical materials a company uses to produce consumer goods. Labor represents employees directly involved in the company's manufacturing procedure. These individuals run the equipment or convert raw materials into finished goods. Manufacturing overhead is the cost of facilities or equipment companies use to produce goods and services.
3. What are Indirect Costs?
Indirect costs contain expenses outside of a company's production process. Office supplies, sales personnel, accounting and customer service operations represent a few common indirect costs. The amount of indirect costs must represent a much smaller proportion of the company's overall business expenditures. High indirect costs specify companies spend more money on potentially non-essential business functions.
4. What are Variable Costs?
Variable costs signify items that change based on a company's production output. Hourly employee wages, utilities, raw materials and shipping charges are a few common variable costs. Business owners can usually avoid high variable costs if they produce fewer goods or services. Though, sales will also fall since companies have lower production outputs and fewer opportunities to create consumer sales.
5. What are Fixed Costs?
Direct and indirect costs are either fixed or variable. Fixed costs represent items that do not change based on the amount of goods or services a company produces. Depreciation, rent, insurance and management salaries represent fixed costs. Businesses should pay fixed costs each month regardless of how many items a company produces or sells.