What is Cost Accounting?

Definition of Cost Accounting.

Cost accounting is a type of managerial accounting that tries to capture a company's overall production cost by monitoring both variable and fixed costs, such as a leasing charge.

Cost accounting, according to historians, was first used during the industrial revolution, when new global supply and demand economies drove manufacturers to track fixed and variable costs in order to automate their manufacturing operations.

Rail and steel firms used cost accounting to control expenses and improve their competitiveness. Cost accounting had become a hot topic in company management literature by the early twentieth century.

Cost accounting is used by a company's internal management department to define both variable and fixed expenses connected with the manufacturing process. It will first compute and report these costs on an individual basis, then compare input costs to output results to aid in evaluating financial performance and making future business decisions.

The types of costs that are included in cost accounting are described below:

• Fixed costs
• Operating costs
• Direct costs
• Variable costs
• Indirect costs

Difference between Cost Accounting and Financial Accounting:

Cost accounting is occasionally used by management within a company to aid decision-making, whereas financial accounting is typically utilized by outside investors or creditors.

Financial accounting communicates a company's financial condition and outcomes to outside parties via financial statements that detail revenues, expenditures, assets, and liabilities.

Cost accounting is particularly beneficial for planning and establishing cost-cutting methods as a management tool that will boost a company's net earnings in the future.

The main difference between cost accounting and financial accounting is that, although in financial accounting, costs are classified according to the kind of transaction, in cost accounting, costs are classified according to management's information needs.

Cost accounting, being an internal method employed by management, is not bound by any universal requirements, such as generally accepted accounting principles (GAAP), and hence varies in application from firm to company or department to department.

Types of Cost Accounting

• Activity-Based Costing
• Standard Costing
• Lean Accounting
• Marginal Costing

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