Cost accounting is a branch of accounting that deals with the recording, classifying, and analyzing of expenses incurred by a company. The main purpose of cost accounting is to provide information that can be used by managers to make decisions about pricing, product mix, and other aspects of the business.
Cost accounting has its roots in the early days of manufacturing when businesses were trying to find ways to control costs and improve efficiency. In the early 20th century, as manufacturing became more complex, cost accounting systems were developed to help managers track and understand the costs associated with production.
The systems break costs down into categories, such as materials, labor, and overhead. This information can then be used to make decisions about how to price products, what products to produce, and where to allocate resources.
Direct vs Indirect Costing
In a job costing system, direct materials are materials that can be easily traced to a specific job. For example, the wood used in a custom cabinet would be a direct material. Indirect materials are materials that are not easily traced to a specific job. For example, the glue used in manufacturing cabinets would be an indirect material.
In a job costing system direct and indirect labor are treated the same as direct and indirect materials. Direct labor is labor that can be easily traced to a specific job. For example, the time spent by a carpenter in constructing a custom cabinet would be direct labor. Indirect labor is labor that cannot be easily traced to a specific job. For example, the time spent by the janitor in cleaning up the factory floor would be indirect labor.
Factory Overhead Applied vs Factory Overhead Control
Factory overhead applied is the total amount of factory overhead that has been assigned to products or jobs. Factory overhead control is the amount of factory overhead that is actually incurred in a given period.
Factory overhead applied is determined by adding up the amounts of factory overhead allocated to products or jobs, and then dividing by the number of products or jobs. Factory overhead control is determined by subtracting the amount of factory overhead incurred in a given period from the amount of factory overhead applied in that period.
If factory overhead applied is greater than factory overhead control, it means that more factory overhead was allocated to products or jobs than was actually incurred. This may be due to inaccurate allocation, or to changes in production levels that resulted in more or less factory overhead being incurred. If factory overhead control is greater than factory overhead applied, it means that less factory overhead was allocated to products or jobs than was actually incurred.