Cost Accounting Definition, Principles, & Importance

what is cost accounting

These can then be further divided into sub-categories such as material yield variance, labor efficiency variance, and overhead efficiency variance. Efficiency variances are a valuable tool for assessing operational effectiveness. They provide insights into whether an organization is meeting its expectations for output levels and can be expressed in terms of costs or other quantities such as hours. The variance is favorable if it determines the actual costs are lower than expected. While cost and financial accounting are essential tools for decision-making, they serve different purposes. They should be used together to get a complete picture of a company’s financial situation.

what is cost accounting

Cost accounting can help the company determine how much it costs to produce each widget and compare those costs to the selling price of the widget. This comparison can help the company identify areas where it is losing money and make changes to improve its profitability. For example, let’s say a bike manufacturer wants to know how many of its newest mountain bikes it needs to sell to break even.


When a company needs to make a big purchase, it must consider taxes to determine how much the item will cost. For example, if a company needs to buy four new office computers for a total of $10,000, and the company’s tax rate on profits is 20%, the cost is $12,500. This means that the company must earn enough money to cover the cost of the items and the tax it must pay on its income before it can make the purchase. As a result, pre-tax dollars are typically necessary for business purchases.

what is cost accounting

Cost accounting helps to achieve cost control through the use of various techniques, including budgetary control, standard costing, and inventory control. Like many other accounting career paths, obtaining licensure as a certified public accountant will appropriately Accounting Equation & Common Accounting Formulas DeVry University position a candidate for cost accounting jobs. To be eligible to take the Uniform CPA Exam, an applicant generally must have 150 college credit hours in relevant coursework, including accounting, finance, business management, and ethical standards.

Contribution margin

This includes direct costs like materials and labor and indirect costs like shipping and overhead. Direct labor costs are the wages paid to workers directly involved in producing a product or service. For example, if you own a manufacturing company, the workers who operate the machines to create your products would be considered direct labor. Material cost is the total cost of all materials used in manufacturing a product. This includes the cost of raw materials, packaging, and other materials used in the production process. There are several different types of material costs, which can be classified based on their purpose or function.

  • As it is a tool for a more accurate way of allocating fixed costs into a product, these fixed costs do not vary according to each month’s production volume.
  • The main goal of lean accounting is to improve financial management practices within an organization.
  • This is done by subtracting the actual amount of indirect costs from the budgeted amount of indirect costs.
  • In contrast to general or financial accounting, the cost accounting method is an internally-focused, firm-specific system used to implement cost controls.

Bureau of Labor Statistics salary and labor market information for Accountants and Auditors is based on national data, not school-specific information. Cost accounting falls squarely into the classification for general corporate accountants. Bureau of Labor Statistics, accountants serving in enterprise management roles earn an average of $82,770 as of 2020, but the top ten percent that year made more than $128,680. CPAs are commonly supporting by two primary organizations, one at the national level and another at the state. The national organization is the American Institute of Certified Public Accountants .

Process Costing

However, many companies and governmental agencies have a minimum education requirement before promoting a candidate into the position. For most professions, this is a bachelor’s degree in accounting or finance. These undergraduate programs will likely include at least one course dedicated to cost accounting, and the different methodologies employed.

what is cost accounting

Operating income is a company’s profit after deducting operating expenses such as wages, depreciation, and cost of goods sold. A fixed cost is a cost that does not vary with the level of production or sales. Indirect costs can’t be directly tied to the production of a product and might include the electricity for a factory. Cost accounting is not governed by any set universal standards such as International Accounting Standards so each firm even if in the same industry have dissimilar costing system. Cost accounting in a nutshell, aids in ensuring that the resources of the business, whether financial or non-financial in proper allocations which translates to increased operations efficiency.

Related Differences

This data helps guide company strategy, including informed decision-making. However, while cost accounting focuses on tracking costs and allocating those costs to specific offerings or activities, financial accounting tracks all aspects of a company’s finances. Often considered a subset of managerial accounting, its end goal is to advise the management on how to optimize business practices and processes based on cost efficiency and capability. Cost accounting provides the detailed cost information that management needs to control current operations and plan for the future.

What is cost in cost accounting with example?

In accounting, the term cost refers to the monetary value of expenditures for services, supplies, raw materials, labor, products, equipment, etc. Cost is an amount that is recorded in bookkeeping records as an expense.

The trinkets are very labor-intensive and require a lot of hands-on effort from the production staff. Activity-Based Costing is an alternative to traditional methods of allocating overhead costs. Rather than being based on a single generic measure, such as machine hours, ABC involves performing an activity analysis to identify appropriate cost drivers. This provides greater accuracy and helpfulness when it comes to managers reviewing the cost and profitability of their company’s specific services or products. There are a variety of cost types that businesses must consider when making decisions. Direct costs are easily identifiable and include raw materials, labor, and shipping.

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