Cost accounting definition
/What is Cost Accounting?
Cost accounting examines the cost structure of a business. It does so by collecting information about the costs incurred by a company's activities, assigning selected costs to products and services and other cost objects, and evaluating the efficiency of cost usage. Cost accounting is mostly concerned with developing an understanding of where a company earns and loses money, and providing input into decisions to generate profits in the future.
Related AccountingTools Courses
Types of Cost Accounting Activities
Key cost accounting activities include the following:
Defining costs as direct materials, direct labor, fixed overhead, variable overhead, and period costs
Assisting the engineering and procurement departments in generating standard costs, if a company uses a standard costing system
Using an allocation methodology to assign all costs except period costs to products and services and other cost objects
Defining the transfer prices at which components and parts are sold from one subsidiary of a parent company to another subsidiary
Examining costs incurred in relation to activities conducted, to see if the company is using its resources effectively
Highlighting any changes in the trend of various costs incurred
Analyzing costs that will change as the result of a business decision
Evaluating the need for capital expenditures
Building a budget model that forecasts changes in costs based on expected activity levels
Understanding how costs change in relation to changes in unit volume
Determining whether costs can be reduced
Providing cost reports to management, so they can better operate the business
Participating in the calculation of costs that will be required to manufacture a new product design
Analyzing the system of production to understand where bottlenecks are positioned, and how they impact the throughput generated by the entire manufacturing system
Cost Accounting Tools
There are a multitude of tools that the cost accountant uses to accumulate and interpret costs, including the following:
Activity-based costing. Assigns overhead costs to cost objects based on activity usage levels. This is a time-consuming but reasonably accurate way to assign overhead costs.
Job costing. Compiles costs at the level of individual jobs. This is the best way to determine the revenues, costs and profits associated with smaller production batches and projects.
Process costing. Compiles costs for large production runs and derives an average cost per unit. Useful for large production volumes.
Standard costing. Uses standard costs, rather than actual costs, from which variances can then be derived.
Throughput analysis. Focuses on the bottleneck operations of a business, and how these constraints impact the overall profitability of the organization.
None of these tools are used by financial accountants, who are more concerned with the production of financial statements.
Cost Accounting vs. Financial Accounting
Cost accounting is a source of information for the financial statements, especially in regard to the valuation of inventory. However, it is not directly involved in the generation of financial statements. Cost accounting is designed to assist management in how a business is run, while financial accounting is designed to provide information about a business to financial statement users.
Related Articles
The Advantages of Cost Accounting
The Difference Between Cost Accounting and Financial Accounting