What Is Cost Accounting?

It’s Cost Control

Cost accounting is a process of recording, analyzing and reporting all of a company’s costs (both
variable and fixed) related to the production of a product. This is so that a company’s
management can make better financial decisions, introduce efficiencies and budget accurately.
The objective of cost accounting is to improve the business’s net profit margins (how much
profit each dollar of sales generates).
Here’s What We’ll Cover:
What Is the Purpose of Cost Accounting?
What Are the Two Basic Types of Costs?
What Is the Cost Accounting System?
What Are the Types of Cost Accounting?

What Is the Purpose of Cost Accounting?

Cost accounting allows for the following:
COST ACCOUNTING ALLOWS A COMPANY TO BUDGET
When a business has a better idea of exactly how its money is being spent, it can better budget
for the future. A company’s accountant is typically already aware of the business’s fixed costs
(utilities, rent, property taxes, etc.), but it’s variable costs (such as labor and raw materials)
change with output. Those costs need to be tracked and estimated for, for the creation of the
next budget. As well, the business will want to know that the money being spent now is being
done in ways that help maximize the company’s profit.
COST ACCOUNTING ALLOWS A COMPANY TO BE MORE EFFICIENT
Typically, an examination of a company’s processes will result in ways to improve them. For
instance, maybe a company will discover it doesn’t need a ten-hour shift on a particular
machine to produce a product, maybe eight hours will do. Or that assigning three people to a
production line has proven too much, as only two are needed.
COST ACCOUNTING CAN MEAN MORE PROFIT
If a company makes its production processes more efficient, meaning it is producing the same
output for less, than it will make more money.
What Are the Two Basics Types of Costs?
There are two basic types of costs:
VARIABLE COSTS
These are costs directly related to the production of a product, such as material and labor costs.
Often these types of costs fluctuate.
FIXED COSTS
These are costs not directly related to production, but needed for production to happen, like
utilities and rent charges for a production facility. Often these types of prices do not fluctuate,
or if they do, they’re not by much.

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