Cost Accounting

Reviewed by Bhavana | Updated on Aug 27, 2020

Meaning of Cost Accounting

Cost accounting is a method of managerial accounting which aims to capture the total production cost of a business by measuring the variable costs of each production phase as well as fixed costs, such as a lease expense.

Historians believe that cost accounting was first introduced during the industrial revolution, when the new global supply and demand economies forced producers to begin monitoring their fixed and variable costs to automate their manufacturing processes. Cost accounting allowed rail and steel companies to manage costs and make themselves more competitive. By the early 20th century, cost accounting had become a widely discussed subject in the literature of business management.

A company's internal management department uses cost accounting to define both variable and fixed costs associated with the manufacturing process. It will first individually calculate and report these costs, then compare input costs with production results to assist in assessing financial performance and in making potential business decisions. Cost accounting includes several forms of costs which are listed below.

  • Fixed costs
  • Operating costs
  • Direct costs
  • Variable costs Indirect costs

Difference between Cost Accounting and Financial Accounting

Cost accounting is sometimes used to assist decision-making by management within a business, financial accounting is usually used by outside investors or creditors. Financial accounting reveals the financial status and results of a corporation through financial statements to external outlets, which provide information regarding its sales, expenditures, assets, and liabilities. Cost accounting can be most useful in budgeting and setting up cost reduction systems as a method for management, which will increase the company's net profits in future.

The key distinction between cost accounting and financial accounting is that while the costs are categorized according to the type of transaction in financial accounting, cost accounting classifies costs according to the management's information needs. Cost accounting, as it is used by management as an internal method, does not have to follow any common requirements such as commonly agreed accounting principles (GAAP) and, as a result, differs in use from business to company or department to department.

Types of Cost Accounting

  • Standard Costing
  • Activity-Based Costing
  • Lean Accounting
  • Marginal Costing