Strategic Cost Accounting and Production Order Management

Cost accounting is an information system designed to predetermine, record, accumulate, distribute, monitor, analyze, interpret, and report the costs of production, distribution, administration, and financing.

Objectives of Cost Accounting

• Provide adequate and timely information for better decision-making.
• Generate data to assist in the planning, evaluation, and control of company operations.
• Determine unit costs to assess inventories in process and finished goods.
• Generate reports on the cost of goods sold to determine profits.
• Contribute to profit by providing advance planning for production, distribution, administration, and financing costs.
• Contribute to the development of enterprise budgets, production schedules, sales, and financing.

Understanding Production and Unit Costs

Production costs (also called operating costs) are the expenses involved in keeping a project, process line, or equipment operating. In a standard company, the difference between revenue (sales and other income) and the cost of production indicates the gross profit.

Unit Cost Valuation

Unit cost can be measured by production and distribution. This cost is used to value the stocks that appear on the balance sheet and the profit and loss statement within lines of work-in-process inventory and finished products. It can also be measured against the possibility of directly or indirectly incurred unit costs.

Costing Systems for Production Orders

In this system, unit costing is usually applied to a group or batch of identical products. The manufacture of each batch is undertaken by a production order. The costs are accumulated for each production order separately; obtaining the unit cost is a simple division of the total costs of each order by the number of units produced.

Characteristics of Cost per Order

The use of this system is conditioned by the characteristics of production. It is suitable only when products are manufactured—either for a specific order or for warehouse stock—and are at all times identifiable as belonging to a specific production order. Different production orders begin and end on any date within the accounting period. This system is ideal for equipment used to manufacture various orders where the small number of items does not justify mass production.

The production order is the individual control for each work being developed. This system can be used by companies producing goods or providing services. It is a method of accumulating costs that concentrates production costs primarily on labor costs.

Managing Manufacturing Overhead Costs

The amount of manufacturing overhead costs charged during a period rarely equals the actual manufacturing overhead costs incurred. This occurs because the default rate of application is based on an estimated indirect manufacturing cost and an estimated denominator (production capacity). Small differences are generally treated as a cost through an adjustment period to the cost of goods sold.