What is Cost accounting?

Cost accounting is a process of monetizing outflow of resources or loss of benefits in relation to certain aspect of the business for which user demands an information which is mostly used in decision making process.

It is in the nature of humans to seek benefit in every activity they pursue. Due to the same reason every type of business especially profit making entities require cost information to determine whether flow of returns is more then the flow of resources spent in anticipation of such returns. Only accurate, complete cost information can help reach good decisions and only correct and timely decisions can help business grow.

Cost accounting’s scope is much larger than the next widely known type of accounting i.e. financial accounting. The depth of information i.e. ‘drill down’ is only possible if information is produced on the principals of cost accounting. It is cost accounting that bridges three tiers of time i.e. past, present and future.

Looking again at the role of cost accounting or costing then it has three roles to play:

  • Measure the outflow of resources i.e. provide basis of measurement of expenditures and quantify them so that they can easily be identified and discussed separately from other outflows
  • Monetize the quantified information as measured by costing techniques. Without expressing the information in financial form it is almost impossible to use this information effectively
  • Producing information in the form that it can be used for decision making purposes. It is cost accounting’s supreme power that it can produce information relating costs and revenues etc as per the desires of user. For example if user likes to know the total cost or cost of particular department or particular product or cost incurred in processing single unit of particular product in a particular department it is all possible only with the help of cost accounting.

It does not only handle the past information well it can also be of great help to plan future with budgeting and different analysis like break-even and CVP analysis, variance calculations and not to forget numerous cost measurement techniques like job-order costing, unit costing, process costing, activity based costing and just some of the well known gems of cost accounting.

And its scope does not even known its boundaries and now extended even to qualitative information with the help of extension to make up management accounting and helping you analyse your business with performance measurement techniques that uses qualitative indicators i.e. your analysis can be done using information that cannot be expressed in monetary terms i.e. Building block model, Balanced score card techniques have just extended the power of cost accounting in non-financial grounds as well.

However, students must remember that management accounting and cost accounting, although often used to mean same, does have differences and they are not exactly same and they must be treated as two separate types of accounting. To learn more about the difference in cost accounting and management accounting you can read What is the difference between Cost accounting and Management accounting?

 

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