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Cost accounting is defined as "a systematic set of procedures for recording and reporting measurements of the cost of manufacturing goods and performing services in the aggregate and in detail. It includes methods for recognizing, classifying, allocating, aggregating and reporting such costs and comparing them with standard costs." (IMA)[1] Often considered a subset of managerial accounting, its end goal is to advise the management on how to optimize business practices and processes based on cost efficiency and capability. Cost accounting provides the detailed cost information that management needs to control current operations and plan for the future.[2]

Cost accounting information is also commonly used in financial accounting, but its primary function is for use by managers to facilitate their decision-making.

• 1Origins
• 2Cost Accounting vs Financial Accounting
• 3Cost Accounting Methods
• 4Elements of Cost Accounting
  • 4.1Material (Inventory)
  • 4.2Labour
  • 4.3Overheads
• 5Classification of Costs
• 6Standard Cost Accounting
• 7The Development of Throughput Accounting
  • 7.1Mathematical Formulas
• 8Activity-based Costing
• 9Integrating EVA and Process-Based Costing
• 10Lean Accounting
• 11Marginal Costing
• 12See also
• 13References
• 14Further reading
• 15External links

All types of businesses, whether service, manufacturing or trading, require cost accounting to track their activities.[2] Cost accounting has long been used to help managers understand the costs of running a business. Modern cost accounting originated during the industrial revolution when the complexities of running a large scale business led to the development of systems for recording and tracking costs to help business owners and managers make decisions.

In the early industrial age, most of the costs incurred by a business were what modern accountants call "variable costs" because they varied directly with the amount of production. Money was spent on labour, raw materials, the power to run a factory, etc. in direct proportion to production. Managers could simply total the variable costs for a product and use this as a rough guide for decision-making processes.

Some costs tend to remain the same even during busy periods, unlike variable costs, which rise and fall with volume of work. Over time, these "fixed costs" have become more important to managers. Examples of fixed costs include the depreciation of plant and equipment, and the cost of departments such as maintenance, tooling, production control, purchasing, quality control, storage and handling, plant supervision and engineering.[3]

In the early nineteenth century, these costs were of little importance to most businesses. However, with the growth of railroads, steel and large scale manufacturing, by the late nineteenth century these costs were often more important than the variable cost of a product, and allocating them to a broad range of products led to bad decision making. Managers must understand fixed costs in order to make decisions about products and pricing.

For Example: A company produced railway coaches and had only one product. To make each coach, the company needed to purchase $60 of raw materials and components and pay 6 labourers $40 each. Therefore, the total variable cost for each coach was $300. Knowing that making a coach required spending $300, managers knew they couldn't sell below that price without losing money on each coach. Any price above $300 became a contribution to the fixed costs of the company. If the fixed costs were, say, $1000 per month for rent, insurance and owner's salary, the company could therefore sell 5 coaches per month for a total of $3000 (priced at $600 each), or 10 coaches for a total of $4500 (priced at $450 each), and make a profit of $500 in both cases.