What is Cost Accounting?

This can be described as the process ofincurred by a business were what modern
accumulating, measuring, analyzing, interpreting andaccountants call "variable costs" because they
reporting cost information that is both useful andvaried directly with the amount of production.
relevant to the internal and external stakeholdersMoney was spent on labour, raw materials, power
of a business entity. External stakeholders areto run a factory, etc. in direct proportion to
those who have a vested financial interest in aproduction. Managers could simply total the
business or company. For example banks (loans),variable costs for a product and use this as a
financial houses (mortgages), investorsrough guide for decision-making.
(investments), etc. Internal stakeholders are theSome costs tend to remain the same even during
business or company directors, managers, divisionbusy periods, unlike variable costs which rise and
heads, etc.fall with volume of work. Over time, the
One of the many benefits of cost accounting isimportance of these "fixed costs" has become
that it turns data into information, knowledge andmore important to managers. Examples of fixed
wisdom about a business entity's operations thatcosts include the depreciation of plant and
is useful for:equipment, and the cost of departments such as
- measuring performancemaintenance, tooling, production control,
- reducing or managing costspurchasing, quality control, storage and handling,
- determining the fees or prices for goods andplant supervision and engineering. In the early
servicestwentieth century, these costs were of little
- deciding to authorize, modify or discontinue aimportance to most businesses. However, in the
program or activity Another benefit is thattwenty-first century, these costs are often more
information on the costs programs and activitiesimportant than the variable cost of a product, and
may be used as a basis to estimate future costsallocating them to a broad range of products can
in preparing and reviewing budget requests. Oncelead to bad decision making.
budgets are approved and executed, costIn modern accounting, costs are measured in
information serves as a useful feedback onaccordance with Generally Accepted Accounting
performance. Moreover, costs may be comparedPrinciples (GAAP). In accordance to GAAP the
to known or assumed benefits to identifyprinciple is to record historical events and assign a
value-added and non-value added activities. Reliablemonetary value to each event that has taken
information on the cost of programs and activitiesplace. Costs are measured in units of currency by
is crucial for the effective management of aconvention. Cost accounting could also be defined
business entity's operations. Cost accounting isas a kind of management accounting that
especially important for fulfilling the objective oftranslates the Supply Chain (the series of events
assessing operational performance. The objectivein the production process that, in concert, result in
is to improve the efficiency and effectiveness ofa product) into financial values.
operations by furnishing program managers andIn conclusion, for any business entity - from the
others with timely and relevant cost-basedsmallest business enterprise to the largest
performance information to allow for continuousmultinational corporation - to be successful
improvement in delivering outputs and outcomesrequires the use of cost accounting concepts and
to stakeholders. Cost accounting has been with uspractices. It provides key data to managers for
since early times to help managers understandplanning and controlling, as well as costing
the costs of running a business. Modern costproducts, services, and customers. The central
accounting originated during the industrialfocus is how it could help managers make better
revolution, when the complexities of running adecisions. For this reason businesses and
large scale business led to the development ofcompanies hire cost accountants and they are
systems for recording and tracking costs to helpincreasingly becoming integral members of
business owners and managers make decisions.decision-making teams instead of just data
In the early industrial age, most of the costsproviders.