Cost accounting involves the recordation, analysis, and reporting of costs to management. The intent behind this type of accounting is to provide insights into the cost structure of a business that can be used to better manage it, thereby improving profitability. It is especially useful for understanding which segments of a business are profitable, and which require improvement. As opposed to financial accounting, cost accounting is primarily intended for internal operational activities.
Cost accounting is also used to compile asset costs and expenses that are to be reported in the financial statements. For example, a cost accountant calculates the cost of ending inventory, which appears in the balance sheet. Similarly, the accountant compiles the cost of goods sold, which appears in the income statement. These are not simple calculations, since the cost accountant may need to deal with cost layering systems, overhead allocation, and byproduct costing splits.
Some of the activities associated with cost accounting are:
Activity-based cost analyses
Marginal cost analysis
Minimum pricing analysis
Standard cost development
Cost accounting systems vary by business, since there are no standards for how they are to be constructed. This differs from financial accounting systems, for which there are comprehensive sets of standards (such as GAAP and IFRS).