Cost Accounting System: Definition & Function

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  • 0:04 Cost Accounting Systems
  • 1:12 Two Types of…
  • 2:06 What Is the General Ledger?
  • 3:02 Product Costs & the…
  • 5:42 Lesson Summary
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Lesson Transcript
Instructor: Christian George
This lesson will discuss the two types of cost accounting systems and illustrate how the product costs of manufacturing integrate into the general ledger through sub-accounts.

Cost Accounting Systems

You are an accountant. You always wanted to be an accountant. Now the day has come. You finished college with a degree in accounting and are now prepared to take on the world in the name of counting beans. You sit at your desk at your first post-graduation job. Your tie is tied neatly, you have plenty of #2 pencils sharp and ready, and your coffee is still hot. Everything is in order.

'Hey, new guy,' comes a loud annoying voice walking up from behind your cubicle. 'The boss wants you to take these manufacturing numbers from Acme Incorporated and integrate them into the GL through their accounts.' This unknown fellow employee hands you a stack of papers. You freeze. GL? Manufacturing numbers? Integrate? Your mind goes blank. 'I better not forget everything I learned,' you think. 'I just barely graduated: too soon to have already forgotten everything.'

'No problem. I'll take care of them,' you reply calmly, taking the papers and spinning around to figure out what's going on. Things slowly start to come back to you as you sit at your desk looking at pages of numbers for a small manufacturing firm in town. You take a deep breath and let it out slowly. 'Let's begin,' you say out loud to yourself.

Two Types of Accounting Systems

There are two types of traditional costing systems used by companies in determining product costs. They are job order costing and process costing.

Job order costing is a method of assigning costs to a specific unit or product. An example would be an auto mechanic repair shop rebuilding an engine. Each engine is an individual item, and the car it came out of is individual. What's wrong with this engine? Probably not the same thing that was wrong with the last engine. For this reason, the cost that the auto repair shop charges is time plus material. It will be different for each engine it rebuilds.

Process costing is a method of assigning costs to mass quantities of a product or service. Consider the same auto repair shop, but now let's look at the oil changes it offers. The cars and customers may be different, but the oil change is the same every time. First the oil and old filter come out, and then the new ones go in.

What Is the General Ledger?

The general ledger is a complete record of financial transactions for a company. The general ledger, or GL, is the financial backbone of a company. It is a holding place for all transactional data and is used to prepare financial statements. It records assets, liabilities, and equity accounts. These accounts can be broken down into specific general ledger sub-accounts that track costs. Examples of these sub-accounts include accounts receivable, cash, and finished inventory.

A real-life example of what a general ledger might look like is your checking account register. You record the date, check number, payee, and amount of check in a line-by-line method in the register. At the end of the line, you keep a running total of the amount of money in your checking account. This is what a general ledger does. It allows a company to track their money as transactions are recorded and even allows the company to list those transactions in separate sub-accounts.

Product Costs & the General Ledger

Let's look at an example of how a company would integrate product costs into the general ledger through sub-accounts.

XYZ Inc. manufactures telephone wire that is used in residential and commercial construction. They use process costing because they manufacture the same type of wire day in and day out for their customers. There are no special orders, except for order quantity. The costs stay fixed as long as XYZ's costs don't fluctuate.

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