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Cost accounting is a type of managerial accounting that focuses on capturing a company’s total
cost of production by assessing all its variable and fixed costs. Unlike financial accounting,
which is used for external reporting, cost accounting is used internally to help businesses make
informed decisions.
Key Elements of Cost Accounting
1. Direct Costs: Costs that can be directly attributed to the production of specific goods or
services, such as raw materials and labor.
2. Indirect Costs: Costs that are not directly traceable to a single product, like utilities and
rent.
3. Fixed Costs: Costs that remain constant regardless of the level of production, such as
lease payments.
4. Variable Costs: Costs that vary with the level of production, like raw materials.
5. Operating Costs: Day-to-day expenses required to run a business, which can be either
fixed or variable.
Types of Cost Accounting
1. Standard Costing: Involves assigning expected costs to products and comparing them
with actual costs to identify variances.
2. Activity-Based Costing (ABC): Allocates overhead costs based on activities that drive
costs, providing more accurate cost information.
3. Lean Accounting: Focuses on value streams and aims to eliminate waste, aligning with
lean manufacturing principles.
4. Marginal Costing: Considers only variable costs for decision-making, useful for short-
term financial decisions.
Cost accounting helps businesses understand where they are spending money, how much they
are earning, and where they might be losing money12. This information is crucial for improving
efficiency and profitability.
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