Cost
accounting basics include capturing costs, organizing these costs and
reporting these costs. That's really what it is. However,
it can be
made complicated with complex products and a large volume of business.
To
understand cost accounting basics lets keep it very simple to
start. Lets
assume You and I own a birdhouse manufacturing
company. We make the very best Tufted Titmouse birdhouses in
the
world. However, we are just getting our business started
and we only
have a few costs to start. These costs include:
Building rent $1000 per month
Heat and electric costs of $300 per month
One birdhouse assembly person we pay $2000 per
month
One truck driver we pay $2000 per month
Wood to make the birdhouses cost $7 per
birdhouse
Office expenses of $500 per month
We estimate that we can manufacture and sell 40 birdhouses in one day
or 800 in a month.
So what are
our costs to make a birdhouse:
Building rent = $1000 per month / 800
birdhouses = $1.25 per house
Heat and electric = $300 per month /
800 houses = $.38 per house
One assembly person = $2000 per month / 800 =
$2.50 per house
One truck driver = $2000 per month / 800 =
$2.50 per house
Wood to make one birdhouse = $7.00 per house
Office expenses = $500 per month / 800
= $.63 per house
So,
if we add up all or costs for one birdhouse we come up $14.26 per
birdhouse. Excellent, now we know what it costs to make one
of
our wonderful birdhouses.
Cost
accountant types like to organize costs so they put costs into three
basic categories:
Direct material costs
Direct labor costs
Burden costs
But,
don't let this confuse you. Accountants have an easier way to look at
these costs. They think of each of these costs as a bucket.
Think
of three buckets on the floor. One labled direct material, one labled
direct labor and one labled burden. Now lets throw our costs to make a
birdhouse into the correct bucket:
Direct
labor is our cost for our assembly person. This
person adds value to our birdhouse.
So, after organizing our costs they look like this:
Direct Labor cost = $2.50
Direct Material cost = $7.00
Burden costs = $4.76
You
may be asking yourself why we bother to put costs into different
buckets. The simple answer is so
we can analyze these costs and
determine better ways to run the business.
For example: Assume
that our assembly labor person can make 50% more birdhouses in the same
amount of time. Lets see what happens to our costs:
Direct labor cost is now $1.67 per birdhouse
Direct material remains at $7.00 per birdhouse
Burden costs are now $3.17 per birdhouse
We
now make our birdhouses for $11.84 instead of $14.26. I hope you can
see the advantage to organizing our costs. Look at how each category of
cost acted when we increased our production.
Can you determine
what will happen to each cost if we hire an additional direct labor
person and make twice as many birdhouses without increasing our burden
costs? You now have the
cost accounting basics!
