Cost Accounting: Definition, Standards, Principles, Methods, Systems

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Accounting is the process of recording, summarizing, analyzing, and communicating financial information about an organization’s economic activities. It includes many branches. Two of the most common ones include cost and financial accounting.

What is Cost Accounting?

Cost accounting is a specialized branch of accounting that focuses on tracking, analyzing, and reporting the costs associated with a business’s operations. It involves measuring and recording expenses such as raw materials, labour, and overhead and provides valuable information for decision-making, cost control, and performance evaluation. Cost accounting helps identify and analyze costs to support decision-making and control expenses.

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Cost accounting helps businesses understand their cost structures, identify cost drivers, and make informed choices regarding pricing, resource allocation, and cost reduction strategies. Companies can enhance efficiency, optimize profitability, and improve overall financial performance by utilizing various cost accounting methods and techniques.

What does Cost Accounting include?

Cost accounting includes many methods and procedures. However, some of the most prevalent ones include the following.

Activity-based costing (ABC)

ABC assigns costs to cost objects (such as products or services) based on the activities that drive resource consumption, providing a more accurate allocation of costs by considering the cost drivers associated with each process.

Standard costing

By setting predetermined standards for cost elements, such as materials, labour, and overhead, standard costing allows businesses to compare actual costs to the budgets, analyze variances, and identify reasons for deviations, aiding in cost control and performance evaluation.

Marginal costing

Emphasizing the behaviour of costs concerning changes in production volume, marginal costing segregates costs into fixed and variable components, focusing on the contribution margin to make decisions regarding product mix, pricing, and profitability.

What is the difference between Cost and Financial Accounting?

The differences between cost and financial accounting come from the following areas.

Focus

Cost accounting primarily focuses on internal operations within a company. It involves measuring, analyzing, and controlling costs incurred in producing, distributing, and administrating goods and services.

Financial accounting, on the other hand, focuses on reporting financial information to external parties, such as investors, creditors, and regulatory authorities. It deals with preparing financial statements to provide a comprehensive view of a company’s financial performance and position.

Audience

The primary users of cost accounting information are internal managers, executives, and employees who need detailed cost information to make informed decisions, such as setting prices, evaluating product profitability, budgeting, and cost control.

In contrast, the primary users of financial accounting information are external stakeholders, including investors, lenders, government agencies, and the general public. They rely on financial statements to assess a company’s financial health, profitability, and ability to meet its financial obligations.

Timeframe

Cost accounting often focuses on shorter timeframes, such as daily, weekly, or monthly. It provides real-time information on costs and performance to aid in managerial decision-making and control.

Financial accounting typically covers longer timeframes, such as quarterly and annual periods. It summarizes historical financial data to provide a snapshot of a company’s financial performance over a specific period.

Regulations and standards

Cost accounting does not have specific regulatory requirements or standardized principles to follow. Companies can design their cost accounting systems based on their unique needs and requirements.

Financial accounting must adhere to established accounting principles and standards, such as Generally Accepted Accounting Principles (GAAP) or International Financial Reporting Standards (IFRS), depending on the jurisdiction.

Conclusion

Cost accounting is a branch of accounting that companies use internally. It involves activities that focus on a company’s operations and activities. Some of the most common areas within cost accounting include activity-based, standard, and marginal costing. This branch differs from financial accounting, which primarily focuses on external reporting.

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