What Is Cost Accounting?
Types of Costs in Cost Accounting
• Cost accounting is a managerial accounting process that involves • Businesses can incur many types of costs depending on their
recording, analyzing, and reporting a company's costs. Cost accounting industry. Here are a few of the most common costs involved in cost
is an internal process used only by a company to identify ways to accounting.
minimize cost and maximizing profit.
• Cost accounting is helpful because it can identify where a company a. Direct Costs
is spending/using its money, how much it earns/profit, and where • A direct cost is a cost directly tied to a product's production
money is being wasted or lost. and typically includes direct materials, labor, and distribution
• Cost accounting has elements of traditional bookkeeping, system costs. Inventory, raw materials, and employee wages for
development, creating measurable information, and input analysis. For factory workers are all examples of direct costs.
many firms, cost accounting helps create and measure business b. Indirect Costs
strategy in a more organic way. • Indirect costs can't be directly tied to the production of a
• Having a clear idea of the costs associated with running a business product and might include the electricity for a factory.
essentially makes it easier for management to devise ways to maximize c. Variable Costs
productivity and profitability. Entrepreneurs and business managers • Costs that increase or decrease with production volumes
rely on actionable information before making allocation decisions. tend to be classified as variable costs. A company that
• Cost accounting helps decision-making because it can be tailored to produces cars might have the steel involved in production as
the specific needs of each separate firm. Modern methods of cost a variable cost.
accounting first emerged in the manufacturing industries, though its d. Fixed Costs
advantages helped it spread quickly to other sector. • Fixed costs are the costs that keep a company running and
• cost accounting and control is focused on managing and controlling don't fluctuate with sales and production volumes. A factory
costs in the short term, while strategic cost management is focused on building or equipment lease would be classified as fixed
reducing costs and improving value in the long term, with a view costs.
towards achieving strategic objectives. e. Operating Costs
Operating costs are the costs to run the day-to-day
How Cost Accounting Is Used operations of the company. However, operating costs—or
• Cost accounting can be applied to many areas of a business. Here operating expenses—are not usually traced back to the
are some examples of how it is used. manufactured product and can be fixed or variable.
Cost Controls Cost Accounting vs. Financial Accounting
• Cost accounting is used to help with cost controls. Firms want to be • Financial and cost accounting systems can be differentiated based
able to spend less on their inputs and charge more for their outputs. on their target audiences. Financial accounting is designed to help
Cost accounting can be used to identify inefficiencies and apply the those who don't have access to inside business information, such as
necessary improvements needed to control costs. These controls can shareholders, lenders, and regulators. For example, retail investors
include budgetary controls, standard costing, and inventory who analyze financial statements benefit from a company's financial
management. accounting.
• Alternatively, cost accounting is meant for those inside the
Internal Costs organization responsible for making critical decisions. Unlike financial
• Cost accounting can help with internal costs, such as transfer prices accounting for publicly traded firms, there is no legal requirement for
for companies that transfer goods and services between divisions and cost accounting.
subsidiaries. For example, a parent company overseas might be the
supplier for its U.S. subsidiary, meaning the U.S. company would be What Are the Advantages of Cost Accounting?
charged by the parent for any purchases of materials. • Cost accounting is helpful because it allows executive management
of companies to understand how to use their resources more
Expansion Plans effectively by tracking and measuring them and studying their effects.
• Companies looking to expand their product line need to understand
their cost structure. Cost accounting helps management plan for future What Is the Main Difference Between Cost Accounting and Financial
capital expenditures, which are large plant and equipment purchases. Accounting?
• Cost accounting is for inside use. It helps company management to
Preparing Financial Statements make decisions and is tailored to the specific needs of each separate
• Cost accounting can contribute to preparing required financial firm. This differs from financial accounting, which must follow a set
statements, an area otherwise reserved for financial accounting. The template and is used to inform people outside the company, such as
prices and information developed and studied through cost accounting investors, about its financial performance.
will likely make it easier to gather information for financial accounting
purposes. For example, raw material costs and inventory prices are
shared between both accounting methods.
What Are the 4 Types of Cost Accounting?
There are various forms of cost accounting. They include:
1. Standard cost accounting
2. Activity-based cost accounting
3. Marginal cost accounting
4. Lean accounting
The Bottom Line
• Keeping on top of costs is essential for businesses. The objective is
to maximize profitability; achieving that goal depends greatly on
managing costs.
• That’s essentially what cost accounting is designed to do. It helps
managers and employees keep track of the costs associated with
running the business, which is information that makes it easier to
boost efficiency and profitability.
Important: Cost accounting is distinct and separate from general
financial accounting, which is regulated by the Securities and Exchange
Commission and the Financial Industry Regulatory Authority and is
critical for creating financial statements.
KEY TAKEAWAYS
• Cost accounting is the reporting and analysis of a company's cost
structure.
• Cost accounting involves assigning costs to cost objects that can
include a company's products, services, and any business activities.
• Cost accounting is helpful because it can identify where a company is
spending its money, how much it earns, and where money is being
lost.
• Having a clear idea of the costs associated with running a business
makes it easier for management to boost profitability.
• Cost accounting is distinct and separate from general financial
accounting, which is designed for outside audiences and heavily
regulated.
• Understanding Cost Accounting
• Even though cost accounting is commonly called a costing method,
the scope of cost accounting is far broader than mere cost. Costing
methods determine costs, while cost accounting is an analysis of the
different types of costs a company incurs.
