What Is Cost Accounting?

Cost accounting is a form of managerial accounting that aims to capture a company's total cost of production by assessing the variable costs of each step of production as well as fixed costs, such as a lease expense.

KEY TAKEAWAYS

• Cost accounting is used internally by management in order to make fully informed business decisions.

• Unlike financial accounting, which provides information to external financial statement users, cost accounting is not required to adhere to set standards and can be flexible to meet the needs of management.

• Cost accounting considers all input costs associated with production, including both variable and fixed costs.

• Types of cost accounting include standard costing, activity-based costing, lean accounting, and marginal costing.

  
  

• Understanding Cost Accounting

  Cost accounting is used by a company's internal management team to identify all variable and fixed costs associated with the production process. It will first measure and record these costs individually, then compare input costs to output results to aid in measuring financial performance and making future business decisions. There are many types of costs involved in cost accounting, which are defined below.

  Types of Costs

  • Fixed costs are costs that don't vary depending on the level of production. These are usually things like the mortgage or lease payment on a building or a piece of equipment that is depreciated at a fixed monthly rate. An increase or decrease in production levels would cause no change in these costs.

  • Variable costs are costs tied to a company's level of production. For example, a floral shop ramping up their floral arrangement inventory for Valentine's Day will incur higher costs when it purchases an increased number of flowers from the local nursery or garden center.

  • Operating costs are costs associated with the day-to-day operations of a business. These costs can be either fixed or variable depending on the unique situation.

  • Direct costs are costs specifically related to producing a product. If a coffee roaster spends five hours roasting coffee, the direct costs of the finished product include the labor hours of the roaster and the cost of the coffee beans.

  • Indirect costs are costs that cannot be directly linked to a product. In the coffee roaster example, the energy cost to heat the roaster would be indirect because it is inexact and difficult to trace to individual products.

This is a course on Cost Accumulation Control Systems

• Know the three manufacturing costs - Direct material, Direct Labor, and Manufacturing Overhead.

• Understand the difference between Product Costs and Period Costs.

• Know-how Product Costs are presented on the financial statement of a manufacturer.

• Understand A job costing system and how management controls production

• Understand an Activity Based Costing System that gives management a better understanding of overhead costs

• Know how A standard costing system simplifies the management control system

• Be able to Perform Variance Analysis in conducting Performance evaluations.

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