Accounting cost elements are the cost types that a business will incur and the costs that are collected for cost accounting.
These are the things that the Cost Accountant types get all excited
about. They spend a lot of time digging into the details of each of
these
cost elements.
Cost Accountants need an easy way to analyze these costs, so the costs
are separated into different cost element categories.
These categories or cost types are direct labor, indirect labor, material cost, burden cost and administrative cost.
Direct
labor is the wage amount paid to those employees directly involved in
the manufacture of the product or service, such as an assembler or
machinist. Direct labor costs get a lot of scrutiny. This is a cost
that management can control and the Cost Accountant is asked to report
on the direct labor cost per part, direct labor downtime, and
improvement trends in labor.
Indirect labor is the labor that is indirectly involved in a
product or service, such as a fork truck driver or machine repair.
These costs too are controllable and management constantly
reviews the costs and looks for ways to be more efficient. Some of the
analysis the Cost Accountant will do is: what savings will be realized
by going to two 10 hour days instead of three eight hours shifts, what
savings are available if we hire outside contractors to rebuild
machinery, etc.
The material cost is the cost of direct materials that go into making
the product. This cost is analyzed to minimize the scrap amount. Scrap
can occur in the production process or in the material handling
process. The purchasing department is tasked to keep the costs of the
purchased material low and to try and achieve cost reductions on this
material.
Burden
costs are accounting costs that are not direct product costs. These
include building
rent, health insurance, utility costs, etc. Administrative costs are
the costs related to administrative functions, such as sales people
salaries, upper management, etc. Management watches these costs, but
controlling these costs is not as easy as the production costs, since
a lot of these costs are considered to be fixed costs. Fixed costs are
like building rent and taxes.
Cost
reports:
Once the accounting
costs are
defined, these costs can be collected and then reported to management.
Costs can be reported by
part, or for the entire plant and can be generated for any
period of time.
These
reports are reviewed by management and often result in management
decisions for change or improvements.
A thorough analysis of costs is usually the job of the Cost
Accountant. The Cost Accountant works for and reports to the management
of the company. Unlike other accounting information, the cost
information for individual products or services is secret and only
reported to management. If the competition knew the cost of other
businesses, they would have an unfair advantage when quoting on new
work.