What is Cost Accounting? 11-9-15

What is Cost Accounting?

In the context of management, the accounting function is central to providing the cost information needed by the personnel, research and development, production, marketing, inventory, administration and other functions of any organization. Cost information is a significantly high proportion of management information; it is the foundation on which plans are made with the aid of budgets and on which standards of efficient performance are established. Cost information is a product of cost accounting which emphasizes costs as critical factors that influence profitability.

Cost accounting is the branch of accounting that developed in response to the reporting needs of manufacturing organizations. Nowadays, cost accounting is applied to the operations of both manufacturing and service organizations. Ever since its advent, cost accounting has involved accumulating historical costs and attributing them to organizational divisions and units of output. These costing methods, as they have related to units of output, principally provide inventory valuations for use in the preparation of the applicable organizations’ financial statements. In the income statements and balance sheets, respectively, these inventory valuations have been integral to cost of goods sold and inventory balances.

Inventory valuations are based on product costs which are always determined at the unit level. Product costs consist of direct costs plus indirect costs. Indirect costs, sometimes termed overhead costs, are to be allocated by means of an allocation key prior to the determination of the total unit cost. For the accuracy of financial statements, costs of processes and projects are to be determined by a procedure similar to that used to compute the unit cost of a product. Manufacturing overheads, operations costing, job-order costing and process costing systems are applicable in computing project and process costs. Many other cost classifications and systems abound in cost accounting.

Although it has remained pivotal to inventory valuation, cost accounting has transcended the preparation of financial statements. It is a beneficial tool for the decision-making, planning and control components of managers’ jobs. On account of its importance to managerial decision-making, cost accounting has been termed managerial or management accounting. Cost accounting benefits managers and their organizations because it produces analyses of cost variances, revenue variances, cost behavior, capital budgets, operating budgets, prices, standard costing, cost-volume-profit relationships and other items. Today, the principal use of cost accounting information is for comprehensive managerial decision-making.

On the occasions when accounting is compartmentalized into cost accounting and financial accounting, emphasis is being placed on the fact that cost accounting primarily serves managers and other internal decision-makers, whereas financial accounting focuses on the use of financial accounting information by government agencies, creditors, shareholders and other external decision-makers. In these instances, the subdivision of accounting is based on the end users of the particular accounting reports.