January 26, 2022


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Cost accounting: Meaning and explanation

Cost accounting: Meaning and explanation

Cost accounting or costing for short is a branch of accounting. It is an aspect of accounting that uses the financial data of a business to provide information that is useful to management in making economic decisions. The term cost accounting is widely used in the manufacturing sector. However, it can be used in other sectors as well, including the e-commerce business.

Definition of Cost Accounting

Here are some definitions of costing:

In summary, costing can be defined as ascertaining the cost of producing or rendering a particular product or service.

According to the terminology of the Chartered Institute of Management Accountant (CIMA), two definitions of cost accounting emerges.

Cost Accounting is “the application of accounting and costing principles, methods and techniques in the ascertainment of cost and the analysis of savings and or excesses as compared with previous experience or standard.”

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The “part of management accounting which establishes budgets and standard cost and the actual cost of operations, processes, departments or products and the analysis of variances, profitability or social use of funds”

Therefore, “costing” may be defined as the part of performance management that involves the process of collecting, presenting, and analyzing financial data to assist management makes long and short term decisions.

Explanation from the definitions of cost accounting

From the definition, the following important points can be explained.

Part of Management Accounting: Cost accounting is an aspect of management accounting. Or as it is recently called performance management. A cost accountant works under the supervision of the management accountant. He provides useful information used by the management accountant in making decisions. Cost data are only used by management. Shareholders and other users are not interested in the information that results from cost data.

Costing Principles: These are the principles that guide the identification of elements that makes up the cost of production or service. The general elements of costs are material cost, labor cost, and expenses. Some costs can be traced to producing particular goods on one hand while another cost may not be traceable.

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Costing methods: The methods used to compute the cost of a product or service depends on the way the goods are produced or the services are rendered. Goods produced in batches usually follow job costing methods. On the other hand, products that follow a particular process uses process costing method. And so on.

Costing techniques: There are majorly two traditional costing techniques used in ascertaining the cost of a product or service: absorption costing and marginal costing techniques. However, recent trends, as well as technology, had brought about other costing techniques. This will be discussed with time.

Analyses of savings: Standard costing and budgeting are powerful tools used for analyses of costs. A standard cost or budget is usually set-up and measured along with the actual cost. Variance analysis is done to compare these costs.

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Another way costs are analyzed is to compare each cost by department or cost centers. When costs are analyzed in this way, it enables management to know which department bears the highest cost or profit. It also aids in future planning.

Next, we will discuss the objectives of cost accounting.