Introduction to Cost Accounting

Introduction

Financial accounting tells the owners how much total profit a business earned, but it cannot say how much each product cost to make, or which job was profitable and which lost money. To answer those questions a separate branch, cost accounting, was developed. This chapter studies what cost accounting is, why it exists alongside financial accounting, how costs are classified, and the different methods of costing used in different industries.

Meaning and objectives

Cost accounting is the process of recording, classifying, allocating and analysing the costs of producing goods or services, so that the cost of each unit, job or process can be found and controlled. Its main objectives are to ascertain the cost of each product or service, to control cost by comparing actual with expected cost, to help fix selling prices, to help management make decisions such as whether to make or buy, and to measure the efficiency of each department.

Importance

Cost accounting matters because it gives management the detailed information that financial accounting cannot. It reveals which products are profitable and which are not, pinpoints waste in the use of materials, labour and overhead, provides the data needed to prepare tenders and quotations, and supplies a basis for budgeting and cost control. Without cost accounting a manager cannot know where money is being lost inside the business.