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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 the total cost of production for a company 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 boarder 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

Difference between Cost Accounting and Financial Accounting

Financial accounting is typically employed by creditors or outside investors, although cost accounting can occasionally help management also to make decisions within a corporation.

Financial accounting makes a company's financial situation and performance known to outside parties through financial statements that include its revenues, expenses, assets, and obligations.

Budgeting and the implementation of cost-cutting measures are two management techniques that can greatly improve a company's future net earnings.

The primary difference between cost accounting & financial accounting is-

In cost accounting, the costs are categorized based on management's information needs. Whereas in financial accounting, the costs are categorized based on the kind of transaction that happened.

Cost accounting differs from business to business or department to department because it is utilized by management as an internal process and is not subject to any standard regulations like generally accepted accounting principles (GAAP).

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.