What is Cost Accounting

Cost accounting is a subject dealing with the appraisal of overall costs in producing and selling the goods or rendering services by an organization. Normally it is based on standard practices and is used by the managers as a system of assessing what expenses and how much amount is incurred to make the goods and services saleable and to sell them to the customers. Simultaneously, cost accounting methodologies can also be used to predict the changes in associated costs in case of implementation of such changes.

Cost accounting has a direct link with utilization of company resources and assists in wise allocation and utilization of the scarce resources to get maximum output from the minimum input. For this purpose cost accounting segment of the company provides relevant information in understandable form with respect to the current situation and future plans. Through the identification of cost of production and further defining the elements and the associated cost in some successive periods the firm becomes capable of understanding the trends in costs and usually predicts the changes quietly aptly in case no significant happenings are going to occur. This analysis enables the firm to surround the situation before it may result in even affecting the break even.

Not only the current situations, cost accounting helps in devising product development and various marketing strategies for future. In product development it assists in determining whether the production of new ranges is viable or not given the current level of resources. In marketing strategies it helps in determining the projected profitability in case of new marketing programs through evaluating the financial viability based on additional costs and expected revenues.  

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Cost accounting is a wide area of study and can be portioned into many further segments such and process costing, job order costing, management accounting, standard costing, differential costing, and opportunity costing. Cost accounting helps in decision making process by a company. Through its tools and techniques cost accounting weighs up the expected benefits with actual costs and guides the company not to involve in unprofitable ventures. It protects company to avoid spoilage of resources and direct to keep and upgrade the operational capacity and efficiency.

A separate cost accounting system is required to be in place in manufacturing organizations because it enables the company to adopt much more effective means for ensuring control mechanism over costs than any other general accounting setup.

In terms of cost accounting the manufacturing costs are divided in to three main heads namely:

• Direct Material – Material Cost Accounting
• Direct Labor – Labor Cost Accounting
• Factory Overhead – FOH Cost Accounting

[linkunit]Above costs constitute three forms of inventory accounts which are used in manufacturing process:

• Material inventory – Raw materials yet to be entered in the production process.
• Work in progress inventory – Semi finished goods in the process of manufacturing.
• Finished goods inventory – Goods in stock in saleable condition.

The above three forms of inventory constitute total inventory to be shown in the balance sheet.