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Cost Accounting
Reviewed by Bhavana | Updated on Nov 11, 2021
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Historians believe that cost accounting was first introduced during the industrial revolution when the new global supply and demand
economies forced producers to begin monitoring their fixed and variable costs to automate their manufacturing processes.
Cost accounting allowed rail and steel companies to manage costs and make themselves more competitive. By the early 20th century,
cost accounting had become a widely discussed subject in the literature of business management.
A company's internal management department uses cost accounting to define both variable and fixed costs associated with the
manufacturing process. It will first individually calculate and report these costs, then compare input costs with production results to assist
in assessing financial performance and in making potential business decisions.
Fixed costs
Operating costs
Direct costs
Variable costs
Indirect costs
Financial accounting reveals the financial status and results of a corporation through financial statements to external outlets, which
provide information regarding its sales, expenditures, assets, and liabilities.
Cost accounting can be most useful in budgeting and setting up cost reduction systems as a method for management, which will increase
the company's net profits in future.
The key distinction between cost accounting and financial accounting is that while the costs are categorised according to the type
of transaction in financial accounting, cost accounting classifies costs according to the management's information needs.
Cost accounting, as it is used by management as an internal method, does not have to follow any common requirements, such as
commonly agreed accounting principles (GAAP) and, as a result, differs in use from business to company or department to department.
Cost accounting is a method of managerial accounting which aims to capture the total production cost of a business by measuring the
variable costs of each production phase as well as fixed costs, such as a lease expense.
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11/14/21, 4:06 PM Cost Accounting - Definition, What is Cost Accounting, and How Cost Accounting works?
Historians believe that cost accounting was first introduced during the industrial revolution when the new global supply and demand
economies forced producers to begin monitoring their fixed and variable costs to automate their manufacturing processes.
Cost accounting allowed rail and steel companies to manage costs and make themselves more competitive. By the early 20th century,
cost accounting had become a widely discussed subject in the literature of business management.
A company's internal management department uses cost accounting to define both variable and fixed costs associated with the
manufacturing process. It will first individually calculate and report these costs, then compare input costs with production results to assist
in assessing financial performance and in making potential business decisions.
Cost accounting includes several forms of costs which are listed below.
Fixed costs
Operating costs
Direct costs
Variable costs
Indirect costs
Financial accounting reveals the financial status and results of a corporation through financial statements to external outlets, which
provide information regarding its sales, expenditures, assets, and liabilities.
Cost accounting can be most useful in budgeting and setting up cost reduction systems as a method for management, which will increase
the company's net profits in future.
The key distinction between cost accounting and financial accounting is that while the costs are categorised according to the type of
transaction in financial accounting, cost accounting classifies costs according to the management's information needs.
Cost accounting, as it is used by management as an internal method, does not have to follow any common requirements, such as
commonly agreed accounting principles (GAAP) and, as a result, differs in use from business to company or department to department.
Related Terms
Voucher
Any written documentation supporting the entries reported in the account books, indicating the transaction's accounting accuracy,
can be referred to as a voucher.
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11/14/21, 4:06 PM Cost Accounting - Definition, What is Cost Accounting, and How Cost Accounting works?
Inventory
Inventory is the term used for the goods available for sale and the raw materials used to manufacture products for sale.
Recent Terms
acid test ratio
Popularly known as quick ratio, the acid test ratio is a financial measure of a company’s ability to pay off its current liabilities.
Credit Risk
Credit risk is the possibility of a loss happening due to a borrower's failure to repay a loan or to satisfy contractual obligations.
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