Cost Accounting

What Is Cost Accounting?

Cost accounting is a process companies go through to determine how much it costs to manufacture a product or provide a service in order to decide:

how much they should make,
the price they should charge and
how profitable the product or service is.

The main goal of cost accounting is to determine the breakeven point, above which sales revenue exceeds costs and the company makes a profit. By going through the cost accounting process, companies know how many units they need to sell in order to make a profit.

How Is Cost Accounting Used?

Cost accounting is generally used for internal purposes for budgeting and forecasting purposes. It's also used to help management find out how they can operate more efficiently, make better decisions on where to best invest their resources, and plan and budget for the future. The process is not necessarily done to generate external financial statements for investors and other stakeholders, although some of the information gleaned is useful there, such as reporting the cost of inventory on the balance sheet and the cost of goods sold on its income statement.

As a result, the cost accounting process varies from company to company and is not necessarily done according to generally accepted accounting principles.

Cost accounting involves assigning the costs incurred to produce each item. Expenses include materials, labor, fixed and variable overhead, and period costs. Period costs include such things as advertising and marketing expenses, travel and entertainment, sales commissions, and other expenses associated with the final product.^[1]

Summary

Cost accounting is a process companies go through to determine how much it costs to manufacture a product or provide a service in order to arrive at the breakeven point, at which point it makes a profit. Cost accounting is useful for several reasons, including planning and budgeting, pricing, making investment decisions and finding efficiencies.