What Is Cost Accounting?

Cost accounting is a process that involves recording, analyzing, and reporting a company's expenses in detail. Unlike financial accounting, cost accounting is an internal process used only by company management to identify ways to improve the efficiency of their operations and reduce spending where possible.

Cost accounting cla𓂃rifies where a company is spending its mo🅘ney and where money is being wasted or lost.

Understanding Cost Accounting

The scope of cost accounting is broader than a mere list of expenses. It is an analysis of the various types of costs ꦗa company incurs.

Cost accounting has elements of traditional bookkeeping, system developm🍸ent, creating measurable information, and input analysis. For many firms, cost accounting helps create and measure business strategy in a more organic way.

Having a clear idea of the costs associated with running a business makes it easier for management to devise ways to maximize productivity and profitability. Entrepreneurs and business managers rely on actionable information before making allocation decisions. Cost accounting buoys decision-making because it can be tailored to the specific needs of the company.

How Cost Accounting Is Used

Cost accounting can be applied to many areas of a business. Here are some examples of how it is used♐♏.

Cost Controls

Cost accounting informs decisions on cost controls. Companies want to be able to spend less on their inputs and charge more for their outp﷽uts. Cost accounting can identify inefficiencies that can be resolved.

Cost controls can include budgetary controls, standard costing, and inventory management.

Internal Costs 

Cost accounting can help with internal expenses such as the cost of transferring goods between a company's divisions and subsidiaries.

For example, a parent company overseas might be the supplier for its U.S. subsidiary, meaning the U.S. company would be charged by the parent for any purchases of materials.

Expansion Plans

Companies looking to expand their product line need to first understand their current cost structure. Cost accounting helps management plan for future 澳洲幸运5官方开奖结果体彩网:capital expenditures, which are large investments in plants and equipment.

Preparing Financial Statements

Cost accounting contributes to the preparation of the financial statements required of public companies. The prices and information developed and analyzed through cost accou🔯nting can make it easier to gather the information neede๊d for financial accounting purposes.

For example, raw material costs and inventory prices are shared between both 澳洲幸运5官方开奖结果体彩网:accounting methods.

Types of Costs in Cost Accounting

Costs are ass💟igned to one of a number of standard categories.

Direct Costs

A 澳洲幸运5官方开奖结果体彩网:direct cost is attributable to a product's production. This typically includes raw materials, labor, and distriꦿbution costs𓆉. Inventory and factory employee wages are examples.

Indirect Costs

Indirec༺t costs cannot be solely attributed to the production of a single product. The electricity cost for a factory is an exa𝄹mple.

Variable Costs

Costs that increase or decrease with the volume of production tend to be classified as 澳洲幸运5官方开奖结果体彩网:variable costs. A company that manufactures cars or toys has ma🏅terialܫs costs that vary with the season and consumer demand.

Fixed Costs

Fixed costs don't fluctuate with sales and production volumes. A factory building or equipment lease would be classified as a fixed cost.

Operating Costs

Operating costs are the costs to run the company from day to day. Operating costs—or operating 🅘expenses—are not directly associated with the manufactured product and can be fixed or variable. Office staff is an example.

Cost Accounting vs. Financial Accounting

Financial and cost accounting systems have different target audiences. 澳洲幸运5官方开奖结果体彩网:Financial accounting is prepared for the company's shareholders, lenders, and regulators. It is a public re🧸port, compiled quarterly and annually, detailing the company's income, outflow, assets, and debts.

Cost accounting is a report prepar🌌ed for the company managers responsible for making critical business decisions.

Unlike financial accounting for publicl꧅y traded firms, there is no legal requirement for ♐cost accounting.

The Bottom Line

Keeping on 🌺top of costs is essential for businesses. The objective is to maximize profitability, and achieving that goal depends largely 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 informa🌳tion that makes it easier to boost efficiency and profitability.