A cost audit system (also referred to as product costing mechanism or costing system) is a framework used by firms to estimate the price of their products for profit analysis, inventory valuation and cost control.

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Estimating the accurate cost of products is an essential for lucrative operations. A firm must recognize which assets are lucrative and which ones space not, and this can be ascertained only once it has estimated the correct cost of the product. Further, a product costing device helps in estimating the closing value of products inventory, work-in-progress and finished goods inventory because that the objective of financial explain preparation.

There are two key cost accounting systems: the project order costing and the procedure costing.

Job stimulate costing is a cost accounting system that accumulates manufacturing expenses separately for each job. The is ideal for firms the are engaged in manufacturing of unique products and special orders. Because that example, that is the costing bookkeeping system most ideal for an event management company, a niche furniture producer, a producer of an extremely high cost air security system, etc.

Process costing is a cost bookkeeping system that accumulates manufacturing prices separately because that each process. It is suitable for assets whose manufacturing is a procedure involving different departments and also costs circulation from one department to another. For example, it is the cost accountancy system used by oil refineries, chemistry producers, etc.

There are cases when a firm supplies a combination of functions of both job-order costing and procedure costing, in what is referred to as hybrid cost accounting system.

In a cost bookkeeping system, price allocation is brought out based on either classic costing system or activity-based costing system.

Traditional costing system calculates a single overhead rate and also applies it come each job or in every department.

Activity-based costing on the various other hand, entails calculation of activity rate and also application that overhead expenses to products based upon their respective task usage.

Based on whether the fixed manufacturing overheads room charged to commodities or not, cost audit systems have actually 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 manufacturing overheads come products. Change costing calculates donation margin, while absorption costing calculates the appropriate gross profit.

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Still further refinement to costing accountancy systems include JIT-costing, back-flush costing.