What is Cost Accounting?

A cost accountant is a type of managerial accountant who is tasked with determining the total production cost of a business. They do so by reviewing all relevant factors such as cost of materials, cost of labor, rent, electricity, maintenance, and similar costs. In this way they can determine both the fixed and variable costs of the product’s production. These costs therefore fall into one of three categories: material, labor and expenses.

By pinpointing all related costs, they are able to present the company’s management with insight as to what funds should be allocated towards product production, as well as highlighting any unnecessary expenditures. The main purpose is to establish what the expected base production costs are so that the management will be able to calculate how many products will need to be sold at what price in order to not only meet the overhead costs, but to actually make a profit.

What does a cost accountant do?

Cost accountants:

• Record, analyze and report all costs related to production and present it to management
• They compile lists of all costs and expenditures that should be entered into the balance sheet and other relevant financial documentation
• Advise the business’s management on how to optimize business practices and processes efficiently and optimally

What are the different types of cost accounting?

There are four main types of cost accounting.

Standard costing

This form of cost accounting utilizes various ratios to determine the efficient use of labor and materials in contrast to the goods and services that are being produced. These ratios are then used to identify and analyze the discrepancies between the estimated production costs in contrast to the actual costs. Once the standard costs are established, the managers can then proceed to finalize planning and budgeting decisions. However, they will also need to take into account the variances that will invariably occur between the standard and actual costs when planning the budgets.

Activity-based costing

This is a costing methodology that that assigns overhead and indirect costs to activities. Any event, unit of work, once-off task, product distribution or similar cost-influencing factor within the business qualifies as an activity. This includes classifying activities that are generally difficult to assign when determining costing, such as salaries, transportation and utilities. By doing so, the managers are presented with broader costing information that allows them to conceive of better pricing strategies than they otherwise would have.

Marginal costing

This costing technique works with two costs, namely the marginal cost, which is variable, and the fixed cost. The marginal cost is the cost that is added to the overall production when one more unit is added to the production cost. It can also refer to the cost involved in serving an extra customer. The purpose in adding these two costs together is to determine what the increased overall cost would be when an extra item is produced. By doing so, the management can optimize its production by means of economies of scale.

Lean accounting

This is a process of financial reporting that is used to measure, evaluate and improve the flow and interactions of all related tasks. The purpose of this is to reduce unnecessary expenditures while improving the product or service that is delivered to the client. Essentially, it is about eliminating cost wastage from the company’s accounting system.

How is cost accounting different from financial accounting?

Do I need a CPA to be a cost accountant?

No. Most cost accountants are trained on the job under the supervision of an experienced cost accountant. However, but they will generally only be hired if they have at least received a college degree in accountancy or similar.