Cost accounting is the process of 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. It is mostly concerned with developing an understanding of where a company earns and loses money, and providing input into decisions to generate profits in the future.
Key activities include:
- Defining costs as direct materials, direct labor, fixed overhead, variable overhead, and period costs
- Assisting the engineering and procurement departments in generating standard costs, if a company uses a standard costing system
- Using an allocation methodology to assign all costs except period costs to products and services and other cost objects
- Defining the transfer prices at which components and parts are sold from one subsidiary of a parent company to another subsidiary
- Examining costs incurred in relation to activities conducted, to see if the company is using its resources effectively
- Highlighting any changes in the trend of various costs incurred
- Analyzing costs that will change as the result of a business decision
- Evaluating the need for capital expenditures
- Building a budget model that forecasts changes in costs based on expected activity levels
- Determining whether costs can be reduced
- Providing cost reports to management, so they can better operate the business
- Participating in the calculation of costs that will be required to manufacture a new product design
- Analyzing the system of production to understand where bottlenecks are positioned, and how they impact the throughput generated by the entire manufacturing system.
There are 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.
Cost accounting is a source of information for the financial statements, especially in regard to the valuation of inventory, but is not directly involved in the generation of financial statements.