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.