What is cost accounting?

Definition of Cost Accounting

Cost accounting is involved with the following:

  • Determining the costs of products, processes, projects, etc. in order to report the correct amounts on a company's financial statements, and
  • Assisting management in the planning and control of the organization
  • Preparing special analyses that assists in making the best decisions

Examples of Cost Accounting

A significant part of cost accounting involves the unit cost of a manufacturer's products in order to report the cost of inventory on its balance sheet and the cost of goods sold on its income statement. This is achieved with techniques such as the allocation of manufacturing overhead costs and through the use of process costing, operations costing, and job-order costing systems.

Cost accounting assists management to plan and control the business through budgeting for operations, capital budgeting for expanding operations, standard costing and the reporting of variances, transfer pricing, etc.

Special analyses includes cost behavior, cost-volume-profit relationships, make or buy decisions, selling prices for products, activity-based costing, and more.

Cost accounting had its roots in manufacturing businesses. However, today it extends to service businesses. For example, a bank will use cost accounting to determine the cost of processing a customer's check and/or a deposit, maintaining a checking account, processing international wire transfers, servicing a mortgage loan, etc. This in turn may provide management with guidance in the pricing of various services.