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Cost Accounting: Definition, Examples, Types

What is Cost Accounting?

Cost accounting is a managerial accounting technique to identify the total expenditure of the business. It is helpful in internal cost controls by measuring expenditure at each stage of production. Likewise, it determines a company's total production cost by measuring both fixed and variable costs in detail. The origins of cost accounting are attributed to the Industrial Revolution when companies were compelled to monitor their fixed and variable costs in order to automate their manufacturing operations due to the new global supply and demand economies.

Steel and rail businesses used cost accounting to control expenses and boost their competitiveness. Cost accounting was a topic that was frequently studied in corporate management literature by the early 20th century.

The company’s internal management uses cost accounting techniques to identify both variable and fixed expenses related to the manufacturing process.

It will first calculate and report these costs on an individual basis, after which it will compare input costs with output outcomes for evaluating a company’s overall financial performance. In a broader sense, it helps in making potential business decisions. 

Cost accounting consists of several forms of costs, which are listed below.

  • Fixed costs

  • Operating costs

  • Direct costs

  • Variable costs

  • Indirect costs


Example of Cost Accounting

A company produces and sells gadgets. The company incurs the following costs for producing 1000 gadgets in a month:


Raw materials: ₹834,000 Direct labor: ₹1,251,000 Variable overhead: ₹417,000 Fixed overhead: ₹1,668,000 The total cost of production is ₹4,170,000, or ₹4,170 per widget. The company sells each widget for ₹5,004, earning a gross profit of ₹834 per widget, or ₹834,000 in total. The company can use cost accounting to analyze each widget's profitability and determine the optimal level of production and sales. The company can also use cost accounting to compare the actual costs with the budgeted costs and to identify any variances or inefficiencies.

Types of Cost Accounting

  • Standard Costing

  • Activity-Based Costing

  • Lean Accounting

  • Marginal Costing 

By quantifying the variable costs of each stage of production as well as fixed costs, like a leasing fee, cost accounting is a way of managerial accounting that tries to capture the overall production cost of a corporation.

Cost accounting was allegedly first used during the Industrial Revolution when the emerging global supply and demand economies compelled businesses to start keeping track of their fixed and variable costs in order to automate their manufacturing procedures