cost_accounting v1.0.0

name: "cost_accounting" description: "Cost accounting from the ground up: fixed, variable, and mixed cost behaviour, absorption versus variable costing, job-order and process costing, activity-based costing, and what each method does to reported profit. Triggers on requests to cost a job or a product, split a mixed cost, compute equivalent units or a predetermined overhead rate, reconcile absorption and variable income, or teach cost accounting with worked numbers."

Cost Accounting

Purpose

Give an agent a complete, numbers-first way to cost products and explain the result. The skill covers how costs behave, how they flow into inventory, and how the choice of method changes unit cost and reported profit. Every method ships with a worked example whose totals tie, a calculator that reproduces the arithmetic, and practice problems with full solutions. A cost figure that does not reconcile is not finished work.

Workflow

1. Classify before you calculate. Sort every cost three ways: by behaviour (fixed, variable, mixed, step), by traceability (direct or indirect), and by reporting (product or period). Product costs are direct materials, direct labor, and manufacturing overhead. They sit in inventory and become cost of goods sold when the unit sells. Period costs, mainly selling and administrative costs, are expensed in the period incurred. Prime costs are direct materials plus direct labor. Conversion costs are direct labor plus manufacturing overhead.
2. State the relevant range. Fixed and variable labels only hold inside a stated range of activity and time. Outside that range, fixed costs step up and variable rates change. Name the range in any answer that uses a cost formula.
3. Split mixed costs when a formula is needed. Use the high-low method for a quick estimate: variable rate equals the change in cost divided by the change in activity at the high and low activity points, then fixed cost equals total cost minus variable cost times activity. Warn that high-low uses only two points. Use least-squares regression when data for many periods exists, because it uses all points. Run bin/costing.py high-low to check the arithmetic.
4. Pick the costing system from the production, not from habit. Use job-order costing when units or jobs differ and direct materials and direct labor can be traced to each job: custom work, construction, professional services, small batches. Use process costing when identical units pass through departments and tracing to a single unit is not practical: food, chemicals, paint, refining, high-volume assembly. Hybrids exist, for example identical chassis with custom options. Say which system fits and why before costing anything.
5. Apply overhead with a predetermined rate. Compute the rate before the period starts: estimated total manufacturing overhead divided by the estimated total allocation base, such as direct labor hours or machine hours. Apply overhead as the rate times the actual base used by the job or department. At period end compare actual with applied. Actual above applied is underapplied, actual below applied is overapplied. Close an immaterial balance to cost of goods sold (underapplied raises it, overapplied lowers it). Prorate a material balance among work in process, finished goods, and cost of goods sold. Run bin/costing.py overhead and bin/costing.py job.
6. Cost the job on a job cost sheet. Add direct materials traced to the job, direct labor traced to the job, and overhead applied. Divide by units in the job only when the job produced identical units. Full steps and a worked job shop example are in references/worked-examples.md.
7. Cost the process with equivalent units. For each department, compute equivalent units separately for materials and for conversion, because materials are often added at one point and conversion happens evenly. Weighted-average equivalent units equal units completed plus equivalent units in ending work in process. Cost per equivalent unit equals beginning plus current costs for that input, divided by its equivalent units. Value transferred-out units and ending work in process, then prove that cost accounted for equals cost to account for. Run bin/costing.py process-wa. The five-step production cost report is in references/formulas.md.
8. Report profit both ways when inventory changes. Under absorption costing, fixed manufacturing overhead is a product cost and is required for external inventory reporting under US GAAP. Under variable costing, fixed manufacturing overhead is a period cost, so variable costing is for internal use. Reconcile the two incomes every time: absorption income minus variable income equals the change in inventory units times fixed manufacturing overhead per unit produced. Production above sales makes absorption income higher. Production below sales makes it lower. Sales alone drive variable income. Run bin/costing.py income.
9. Use activity-based costing when a single rate distorts. Keep the job-order or process system for materials and labor. Replace the single overhead rate with activity pools: assign overhead to pools in stage one, then assign each pool to products with its own cost driver in stage two, such as setups, inspections, purchase orders, or machine hours. Compare the ABC unit cost with the traditional unit cost and name the distortion in dollars per unit. Run bin/costing.py abc. Method detail is in references/method-comparison.md.
10. Prove the work. Recompute every example with the calculator, check that process costs tie, that ABC and traditional totals both sum to total overhead, and that the absorption and variable incomes reconcile. Then set or check understanding with references/practice-problems.md.

Output Contract

A finished costing answer ships with:

• The classification of each cost used, and the relevant range when a cost formula is stated.
• The system chosen (job-order, process, or hybrid) and the production fact that decides it.
• The overhead rate, its allocation base, and the underapplied or overapplied balance with its disposition.
• Unit costs with the inputs shown, so a reader can recompute them, plus department or job totals that tie to the inputs.
• When both profit methods appear, both operating incomes and the one-line reconciliation between them.
• For an ABC comparison, overhead per unit under the traditional rate and under ABC for each product, with the per-unit distortion stated.

Operating Rules

1. Never put period costs into product cost. Selling and administrative costs are expensed as incurred under both absorption and variable costing. The only fixed cost that changes treatment between the two methods is fixed manufacturing overhead.
2. Never mix the two profit methods in one statement. An income figure is either absorption or variable. If a problem gives production and sales that differ, expect the two incomes to differ and reconcile them. Equal production and sales, with no beginning inventory change, is the only simple case where they match.
3. Compute equivalent units separately for materials and conversion. Using one percentage for both is the most common process costing error. A unit can be 100 percent complete for materials and 40 percent complete for conversion.
4. Applied overhead is an estimate by design. A balance at period end is normal, not an error by itself. Report its size and cause. Do not quietly force actual and applied to match by changing the rate after the fact.
5. A single plantwide rate is a claim, not a default. It claims all products consume overhead in proportion to the one base. When products differ in setups, inspections, or complexity, test that claim with ABC before trusting a price, a bid, or a product-drop decision built on the single rate.
6. Fixed cost per unit is not a cost behaviour. Total fixed cost stays constant inside the relevant range while fixed cost per unit falls as volume rises. Never quote a fixed cost per unit without the volume it was computed at.
7. Accuracy rule. Every factual claim must be verified against a primary source, such as the OpenStax managerial accounting text. Never invent numbers, dates, or quotes. Worked numbers in this skill are original arithmetic, recomputed with bin/costing.py, and each reconciliation is shown so the reader can verify it.