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This article explains the essential concepts of cost accounting. The overview provides an introduction to the basic cost accounting objectives and techniques, the roles of the controller and cost accountant within the corporate management structure and the ethical considerations that guide cost accountants. This article also explains the basic cost accumulation methods that are used in cost accounting systems. These methods include job order costing, process costing, backflush costing, hybrid costing and joint and by-product costing. Further, explanations of the most common costs that companies must plan for and control are included, such as direct labor, direct material and factory overhead costs. Finally, this overview describes how cost accounting techniques affect business considerations in areas such as budgeting, pricing and inventory costing methods, which include throughput, direct, absorption and activity-based costing systems.
Keywords Activity-Based Costing; Activity-based Management (ABM); Actual Cost System; Backflush Costing; Balance Sheet; By-product; Controller; Cost Accounting; Cost Accumulation; Cost Driver; Direct Labor; Direct Materials; Factory Cost; Factory Overhead; Fixed Cost; Indirect Cost; Job Order Costing; Joint Cost; Labor Productivity; Process Costing; Sunk Cost; Variable Cost
Accounting > Cost Accounting
Cost accounting is the application of accounting and costing principles to the tracking, recording and analysis of the costs associated with the products or services a business produces and the activities involved in the production process. Broadly speaking, cost accounting objectives include the preparation of statistical data, application of cost accumulation and cost control methods to production processes and analysis of an organization's profitability as compared with previous periods of time and projected budgets. Cost accountants use basic accounting techniques to compile and analyze data to meet these objectives. In performing these tasks, cost accountants work within the controller's office or the accounting department of most companies. And in addition to any internal company policies that govern their duties, cost accountants must consider the ethical principles that guide the accounting and financial reporting industries. The following sections provide a more in-depth explanation of these concepts.
Introduction to Cost Accounting
Cost accounting identifies, defines, measures, reports and analyzes the various elements of direct and indirect costs associated with producing and marketing goods and services. Cost accounting also measures performance, product quality and productivity. Direct costs can be directly traced to producing specific goods or services, such as the cost of raw materials used in the production of a final consumer good. Indirect costs are expenditures on labor, materials or services that cannot be economically identified with a specific saleable cost unit. Indirect costs include salaries for employees and rental or lease payments for office or factory space.
Cost Accounting Objectives & Techniques
The main objective of cost accounting is to compile, analyze and transmit both financial and non-financial information to management for planning, controlling and operational evaluation purposes. At its most basic, cost accounting measures the economic sacrifice an organization makes to achieve its goals. Costs are generally categorized by expenditure type. For instance, product costs represent the monetary measurement of resources an organization uses, such as material, labor and overhead. Service costs are the monetary sacrifices it makes to provide the goods or services. Cost accounting tracks these costs and provides this...
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