Cost accumulation definition
/What is Cost Accumulation?
Cost accumulation involves the use of a formal cost accounting system to collect cost information. By collecting and analyzing cost information, management can make more informed decisions about the operations of a business. Cost accumulation systems fall into two main categories, which are noted below.
Related AccountingTools Courses
Job Cost System
A job cost system accumulates materials, labor, and overhead costs about individual production or service jobs. It is designed for production processes that create products in smaller batches. The information is also useful for determining the accuracy of a company's estimating system, which should be able to quote prices that allow for a reasonable profit. The information can also be used to assign inventoriable costs to manufactured goods.
Example of Cost Accumulation within a Job Cost System
A custom furniture company receives an order to build a set of 10 handcrafted dining tables for a client—this specific order is treated as a job. As work begins, the company accumulates direct materials costs (e.g., $2,000 for wood), direct labor costs (e.g., $1,500 for 60 hours of carpenter time), and applies manufacturing overhead (e.g., $1,000 based on a predetermined overhead rate). All these costs are tracked and recorded under Job #102 in the job cost sheet.
Once the job is completed, the total accumulated cost—$4,500 in this case—represents the full cost of fulfilling that specific client’s order. This allows the company to assess profitability and create accurate client invoices based on actual job-related costs.
Process System
A process system accumulates costs by cost center and then assigns average costs to products. It is designed for production processes that create large quantities of units over an extended period of time, where the cost of each product produced is assumed to be the same as the cost of every other product.