What is Cost Accounting ?

The costs that remain constant despite changes in production, process or projects are referred to as fixed costs. For example, in a manufacturing unit the salaries of the office staff will remain fixed irrespective of the production.

These costs vary with the production, process or project changes. For example, in an organization manufacturing toy the material and labour cost will be dependent on the production.

Cost accounting comes down to two words – “cost” and “accounting”. First, let’s understand what “cost” is. Then we will look at “accounting”.

What is “cost”?

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.

What is “accounting”?

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.

Cost Accounting Definition
Cost accounting is the art and science of recording, classifying, summarizing, and analyzing costs to help management make prudent business decisions.

Purpose of Cost Accounting
There are basically three purposes of cost accounting –
1_Cost control:
2_Cost computation:
3_Cost reduction:

Purpose of Cost Accounting
There are basically three purposes of cost accounting –
1_Cost control:
2_Cost computation:
3_Cost reduction:

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.

This is important since management allocates limited resources to particular projects or production processes.

Cost computation: 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: 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 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. 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.

Indirect costs, on the other hand, are costs which can’t be identified easily. The reason these costs can’t be identified separately because these costs assist in functioning multiple activities.

For example, the rent business pays for running a production operation would be called indirect costs since we can’t identify how much portion of rent is used for the production of goods, how much is used for preparing the raw material, how much is used to install the simulation systems that can train the workers.

Understanding these two types of costs is important since we would be using these costs in calculation of cost of sales per unit for a particular product.

Fixed costs are costs that don’t change with the increase or decrease of production units. That means these costs remain similar within a broad range of the spectrum.

Plus, the per unit fixed cost changes as the production increases or decreases. For example, rent is a fixed cost. Even if the production increases or decreases, the business needs to pay the same rent month in and month out.

Variable cost is the exact opposite of fixed cost. Variable cost changes as per the increase or decrease of production units.

But even if the total variable cost changes, per unit cost per unit, remain same irrespective of changes in production units. For example, the cost of raw material is a variable cost.