Accounting Articles > General Accounting:
Cost accounting in Chicago
Cost accounting is all about estimates, guesstimates, averages and reasonableness.
This is a very complex subject. Entire accounting classes and 1000 page textbooks are consistently written about this subject. There is no way that I can address this subject fully in this article, but here is a quick example:
I operate a plant that makes four different types of products, all of which are finished goods. Last month we had $20,000 in fixed expenses. We produced our finished products in the following volumes:
- Product A
- 1,000
- Product B
- 1,000
- Product C
- 10,000
- Product D
- 8,000
- Total
- 20,000
A reasonable person would say $20,000 divided by 20,000 pieces is $1 per unit produced.
But that’s not how it works in the real world because unit production is ongoing and blends between months. For example:
During that same month we had partially produced 6,000 units of Product A, and 4,000 of Product B.
In addition, at the beginning of the month, 5,000 units of Product C and 3,000 of Product D were already partially constructed going into the month.
How do we cost all of this now?
The reasonable answer would be to come up with an average cost over a three or four month period of time. But what happens if the insurance and property taxes on the plant increased in the last month by 35%? Now averaging this over any period of time will give you costing numbers that are too low, because they don’t reflect current costs.
The subject of cost accounting is all about estimates, guesstimates, averages and reasonableness. If your current firm is having difficulties with this type of question, we would love to handle a special or on-going project to do some costing for you. We will also help you put in some cost controls. Contact us today.
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