Definition
Function costing is a cost accounting technique that involves collecting the costs of an organization by distinct functions or operational areas and presenting them to the respective functional management. The objective of function costing is to provide detailed cost data to functional managers to aid them in performance evaluation and cost control. This method enables a comprehensive understanding of the financial performance and operational efficiency of various functions within an organization.
Examples
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Manufacturing Firm: In a manufacturing company, functions might include procurement, production, quality control, and maintenance. Function costing would involve analyzing the costs associated with each of these functions separately.
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Healthcare Organization: In a hospital, functions could include inpatient services, outpatient services, emergency care, and administration. The costs incurred in each of these functions would be gathered, analyzed, and reported to the relevant managers.
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Retail Company: A retail company might break down its functions into sales, customer service, inventory management, and logistics. Function costing will involve tracking expenses for each of these areas to assist in budgeting and efficiency improvements.
Frequently Asked Questions (FAQs)
What is the purpose of function costing?
The primary purpose of function costing is to offer detailed insights into the costs associated with different functions within an organization. This helps functional managers to control expenses, enhance operational efficiency, and make informed budgeting and strategic decisions.
How does function costing differ from other costing methods?
Function costing is distinct because it focuses on collecting and analyzing costs by specific operational functions rather than by products or cost centers. This contrasts with other methods like process costing, which accumulates costs for each process or activity regardless of which function they belong to.
Which industries typically use function costing?
Industries such as manufacturing, healthcare, and retail frequently employ function costing. This method is useful for organizations where it’s important to track and manage costs specific to functional areas for better accountability and efficiency.
What benefits does function costing offer to management?
Function costing delivers several benefits including better cost control, improved resource allocation, enhanced budgeting accuracy, and more informed decision-making based on functional performance metrics.
Are there any disadvantages to using function costing?
One drawback of function costing is the complexity and time consumption involved in accurately collecting and assigning costs to various functions. It may also require detailed and regular reporting, which can be resource-intensive.
Related Terms
- Cost Accounting: A field of accounting focused on recording, defining, and reporting costs associated with a company’s operations.
- Operating Statement: A financial report that summarizes the revenues, costs, and expenses incurred during a specific period.
- Functional Management: Managing different functions within an organization, such as human resources, finance, or production, to ensure they operate efficiently and effectively.
- Process Costing: A costing method used where similar items are produced in a continuous process, with costs being assigned to each stage of production.
Online Resources
- Investopedia - Cost Accounting
- AccountingTools - Function Costing
- The Chartered Institute of Management Accountants (CIMA)
Suggested Books for Further Studies
- “Cost Accounting: A Managerial Emphasis” by Charles T. Horngren, Srikant M. Datar, and Madhav V. Rajan
- “Management and Cost Accounting” by Colin Drury
- “Cost Accounting for Dummies” by Kenneth Boyd
