What is Cost Accounting ?

Cost control: The first function of cost accounting is to control the cost within the budgetary constraints management has set for a particular product or service.

Cost computation: This is the main function of cost accounting and this is the source of all other functions of cost accounting.

Cost reduction: Cost computation helps the company reduce costs on projects and processes. Reduction in costs means more profits since the margin will naturally increase.

Direct costs are directly involved in producing goods. That means direct costs can be directly identified as being used in the production of goods.

In traditional accounting, the profit and loss is derived by deducting expenses from income whereas in cost accounting the motive is to be cost effective by reducing costs of process, production or project.

The cost incurred in selecting one option over another is called opportunity cost. For example in a toy manufacturing unit with limited labour hours and material, the decision to produce one particular toy say ‘Dancing Monkey’ will result in non-production of an other toy say ‘Spinning top’. So while considering the profitability of toy ‘Dancing Monkey’ the organization has to consider the profit of ‘Spinning top’ that it forgoes.

As per this technique, the management may decide the number of units to be produced. Suppose a toy unit is already producing 100 units of ‘Dancing Monkey’ toy, this technique will help the management understand that if the production is increased to 150, will it be profitable. In this technique, only the variable costs for additional units produced will be considered. Fixed costs are not taken into consideration as they do not vary with changes in production.

The Institute of Cost Accountants has constituted Cost Accounting Standards Board (CASB) to provide guidance and uniformity in costing. The Board has issued 24 standards to bring about better understanding of various elements of cost and best practices to be used.

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.

A cost account is a financial specialist who determines the actual costs associated with providing a service or manufacturing a product. They accomplish this by scrutinizing all of the associated expenses within the supply chain. The purpose of cost accounting is for profitability analysis and budget preparation.

Cost accountants are familiar with all of the methods of cost accounting and their associated software programs. Having said that, there are actually four different types of cost accounting methods, so cost accountants may specialize in certain areas.

A multitude of tools that the cost accountant uses to accumulate and interpret costs, including job costing, process costing, standard costing, activity-based costing, throughput analysis, and direct costing.

First, standard costing systems assigns the average cost to every direct expense, such as labor, materials and overhead, that is associated with each product. This method of cost accounting is quite popular with small businesses because of its simplistic approach to standardization.

Those who want to pursue a career in accounting need strong math skills and knowledge of statistics. They should have the ability to quickly interpret facts and compare data in order to synthesize actionable business intelligence. Any job in accounting will require a bachelor’s degree related to finance, accounting or business administration. These degrees are intended to provide participants with a foundational understanding of organizational accounting concepts.

cost accounting is used to compute the unit cost of a manufacturer's products in order to report the cost of inventory on its balance sheet and the cost of goods sold on its income statement. This is achieved with techniques such as the allocation of manufacturing overhead costs and through the use of process costing, operations costing, and job-order costing systems.

Cost accounting assists management by providing analysis of cost behavior, cost-volume-profit relationships, operational and capital budgeting, standard costing, variance analyses for costs and revenues, transfer pricing, activity-based costing, and more.

Cost accounting had its roots in manufacturing businesses, but today it extends to service businesses. For example, a bank will use cost accounting to determine the cost of processing a customer's check and/or a deposit. This in turn may provide management with guidance in the pricing of these services.

Cost is an expense incurred by a particular unit. In another way, the cost is what the business sacrifices in order to produce one unit of product.
Accounting is the art and science of recording, classifying, summarizing, and analyzing inputs to make a sense of the information related to financial, management, or cost.

The first function of cost accounting is to control the cost within the budgetary constraints management has set for a particular product or service. This is important since management allocates limited resources to particular projects or production processes.

This is the main function of cost accounting and this is the source of all other functions of cost accounting. In the section below, we will see how we can calculate the cost of sales per unit for a particular product.

Cost computation helps the company reduce costs on projects and processes. Reduction in costs means more profits since the margin will naturally increase.

Direct costs are directly involved in producing goods. That means direct costs can be directly identified as being used in the production of goods. For example, we can talk about direct material and direct labor that is used in producing goods. These costs we can identify as direct costs.

Cost accounting is much more than a cost statement. But still, cost accounting example will give us an idea about how to calculate the cost of sales per unit for a particular product –

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 a method of accounting wherein all the costs involved in performing any process, project or product are noted and analyzed. Such analysis helps the management in taking strategic decisions.