A cost audit system (also referred to as product costing device or costing system) is a frame used by that company to calculation the expense of their products for profit analysis, list valuation and cost control.
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Estimating the accurate cost of assets is crucial for rewarding operations. A firm must recognize which products are lucrative and which ones are not, and also this deserve to be ascertained only as soon as it has estimated the correct price of the product. Further, a product costing mechanism helps in estimating the closing value of materials inventory, work-in-progress and finished products inventory because that the objective of financial explain preparation.
There are two key cost accountancy systems: the project order costing and the process costing.
Job order costing is a cost bookkeeping system that accumulates manufacturing costs separately for each job. The is suitable for firms the are involved in production of unique products and special orders. For example, the is the costing accounting system most ideal for an event management company, a niche furniture producer, a producer of very high cost air surveillance system, etc.
Process costing is a cost audit system that accumulates manufacturing expenses separately because that each process. It is ideal for products whose manufacturing is a procedure involving different departments and costs circulation from one room to another. For example, that is the cost accountancy system used by oil refineries, chemical producers, etc.
There are instances when a firm offers a mix of features of both job-order costing and process costing, in what is dubbed hybrid cost bookkeeping system.
In a cost accountancy system, expense allocation is lugged out based on either classic costing device or activity-based costing system.
Traditional costing system calculates a single overhead rate and applies it to each job or in each department.
Activity-based costing on the various other hand, involves calculation of task rate and application that overhead costs to products based upon their respective activity usage.
Based on even if it is the fixed manufacturing overheads space charged to products or not, cost accountancy systems have two variations: variable costing and absorption costing. Variable costing allocates just variable manufacturing overheads to inventories, while absorption costing allocates both variable and also fixed production overheads come products. Variable costing calculates contribution margin, while absorb costing calculates the pertinent gross profit.
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Still additional refinement come costing bookkeeping systems incorporate JIT-costing, back-flush costing.