Cost accounting definition

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 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. However, it is not directly involved in the generation of financial statements.

Related Courses

Cost Accounting Fundamentals 
Financial Analysis