Factory Cost Accounting

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Factory cost accounting is a form of management accounting that focuses on establishing a strong financial plan with the aim of cutting the overall cost but improving the profitability and revenue of the business.

Since there is a broad sense regarding this sensitive accounting subject, business owners should give time to learn the essentials of factory cost accounting for business reasons.

What is Factory Cost Accounting?

Product costing is the way of assigning value for the selling price of a particular product. Maybe you are wondering how businesses formulate the calculation for the product’s selling price and how they arrive for that certain value. Assigning a figure can be math-intensive and may require some accounting approach in order to ensure that the assigned selling price for the product is competitive and reasonable for the customers. Indeed, running a business in a manufacturing industry is really a complicated business endeavor, and the burden of establishing a solid financial plan, product analysis, decision-making, and to improve profitability or revenue output can be lessen through “factory cost accounting”.

In a broader sense, factory cost accounting is a form of management accounting that deals with the accumulation of information that can be used in product pricing or assigning of selling price for a particular product. It also covers for the preparation of the budget for the whole manufacturing process based on the actual cost of the project or operation. Since there are numerous accounting approaches in cost accounting, we shall just tackle on the basics of how a selling price is established for a product.

The three main elements of cost accounting are direct raw materials cost, direct labor cost, and overhead or indirect expenses (also known as factory overhead expenses). These distinctive costs fall under the three main inventories such as materials, work in process, and finished goods. In the materials inventory, it is described as the unprocessed raw materials; while work in process is referred to the goods that entered in the manufacturing process phase. The finished goods inventory is simply the processed goods ready for selling. Based on the costs involved in the manufacturing process a selling price can be assigned for every output product.

Essentials of Factory Cost Accounting and its Benefits

There are several benefits that a manufacturing business can acquire from having a systematic factory cost accounting system and they are the following:

  • Proper classification and assigning of different types of costs (direct raw materials, direct labor, and factory overhead expenses).
  • Effective selling prices adjustment in cases of economic depressions.
  • Efficient inventory management on materials and supplies in eliminating defective or outdated materials that can cause losses to the business.
  • Accurate assessment and evaluation of the inventories (materials, work in process, and finished goods) for proper bookkeeping.
  • Effective labor cost management to control the amount spent in paying the wages of the employees and for the proper distributing of workforce for the operation.
  • Successful budget management and cost-cutting approaches.
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