Cost accounting definition

What Is Cost Accounting

Cost control is the analysis of expenditures to see if any can be reduced or eliminated. Budgeting is the process of developing a model of planned revenues and expenses for future periods, which can be used to plan for financing needs and control expenditures. Breakeven analysis calls for the calculation of the sales level at which a business or product line breaks even. This is useful for determining business or product line viability. Financial accounting is governed by regulators and must comply with the generally accepted accounting principles or International Financial Reporting Standards . Cost accounting, however, doesn’t have to abide by these regulations since it’s used internally.

The materials directly contributed to a product and those easily identifiable in the finished product are called direct materials. For example, paper in books, wood in furniture, plastic in a water tank, and leather in shoes are direct materials. Other, usually lower cost items or supporting material used in the production of in a finished product are called indirect materials.

Absorption Costing

Cost ascertainment involves the collection and classification of cost in the first step. Those items of expenses which are capable of charging directly to the products manufactured are allocated. An ideal costing system is one that provides cost data in an analytical form to the management. The cost accounting system should be capable of adapting itself to the changing situations of business. It must be capable of expansion or alteration depending upon the needs of the business.

In case of impersonal call center, the activities are done with the help of plant and machinery. Generally, the terms management accounting and cost-accounting are considered to be interchangeable.


Since the information is used internally, the information may be presented on any logical basis just so long as it will aid the manager to reach an appropriate, informed decision. There may What Is Cost Accounting be different types of cost drivers such as number of units or types of products required to produce. If there is any change in cost driver, the cost of product changes automatically.

What Is Cost Accounting

For example, the number of nuts and bolts needed to assemble lawn mowers would increase and decrease exactly in proportion to the number of mowers produced and are therefore considered to be a variable cost. There are four primary methods of cost accounting, each of which allocates indirect costs to individual product lines and/or services.

Contribution margin

Costs other than manufacturing costs are called period costs for this reason. None of the period costs are deferred to a future period because none of them represent an asset as defined by the accounting profession. Materials and labor can be classified as either direct or indirect in relation to the final product. Direct materials are those major components that can be easily traced to the finished good and are accounted for carefully due to their significance to the product. In the case of manufacturing a lawn mower, for example, these types of materials would include the engine, housing, wheels, and handle. Indirect materials would include those minor items that are essential but which cannot be easily traced to the finished product. Examples of these would be screws, nuts, bolts, washers, and lubricants.

Measuring the Total Cost of a Smartphone – CMSWire

Measuring the Total Cost of a Smartphone.

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The Controller is responsible for determining the fringe rate based on all labor and fringe costs, regardless of where an employee works. A single fringe rate must be applied to all employees in all projects, unless the Controller has developed separate cost pools that reflect a significantly different fringe cost among groups of employees. Are all costs that can be specifically or readily identified with producing a specific product or providing a specific service. These direct costs include direct labor, equipment purchased for use on a program, and other direct costs. The portion of base wages and salaries, direct labor, be identified with and charged to a particular activity. Is the cost that should be incurred to produce a product or provide a service based on past experience producing or providing like-items. Thus, comparison of actual costs with the predetermined benchmark alerts program managers to those areas in which the actual costs appear excessive.

Cost Control

In this step under cost accounting cost of goods sold of a product is calculated. At the first step of cost accounting, it ascertains and records the element of cost for determining of cost of production. Unit cost should include only those costs which have been actually incurred. For example unit cost should not be charged with selling cost while it is still in factory. It is said that the cost involved in installing and working a cost system is out of all proportions to the benefits derived therefrom. It may be stated in this connection that a costing system must be a profitable investment and should produce benefits commensurate with the expenditure incurred on the system.

What Is Cost 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.

Cost accounting has become an essential tool of management

Raw materials, work in progress, and final goods are all included on a broad level. Changes, per unit cost per unit, remain the same irrespective of changes in production units.

  • Depreciation of fixed assets, such as factory machinery and store equipment.
  • Business owners who focus on the cost aspect of business can better understand how to reduce costs and increase profitability.
  • Cost-accounting methods are typically not useful for figuring out tax liabilities, which means that cost accounting cannot provide a complete analysis of a company’s true costs.
  • Raw materials, work in progress, and final goods are all included on a broad level.
  • Process costing is often the better choice for firms that mass-produce standardized products.

The more products you produce, the more you will pay for packaging and distribution. Even if you pay more for components and if you pay more for hours worked, this still goes under direct costs in most instances.