A:

Cost accounting is distinct and separate from general financial accounting, which is regulated by generally accepted accounting principles (GAAP) and is responsible for creating financial statements. Instead, cost accounting aims to report, analyze and lead to the improvement of inter-business cost control and efficiency. Cost accounting is a system of operational analysis for management.

The Scope and Nature of Cost Accounting

Even though cost accounting is commonly referred to as a costing method, the scope of cost accounting is broader than just costing. In cost accounting, there are elements of traditional bookkeeping, system development, creating measurable information and input analysis.

Modern methods of cost accounting were first prevalent in the manufacturing industries, though its advantages helped it spread to other sectors quickly. For many firms, cost accounting helps create and measure business strategy in a symbiotic, endogenous way.

Financial accounting and cost accounting systems can be differentiated based on their respective target audiences. Financial accounting is designed to help those who don't have access to inside business information, such as shareholders, lenders and regulators – the consumers who analyze financial statements. Alternatively, cost accounting is meant for those who are inside the organization and are responsible for making critical decisions.

There is no legal requirement for cost accounting (unlike financial accounting for publicly traded firms); companies use it because it's highly advantageous to do so. It's much easier for a business to know how to use its resources better when it can track them, measure them and study their effects. This is what cost accounting provides.

Objectives of Cost Accounting

Often, the simplest and most important objective of cost accounting is to determine selling prices. To use a basic example, the seller of sandwiches needs to be able to track the cost of bread, lettuce, sandwich meats, mustard and other ingredients. Otherwise, it would be difficult to know how much to charge for a sandwich.

A second, related objective is cost control. Firms want to be able to spend less on their inputs and charge more for their outputs. Cost accounting can be used to identify possible inefficiencies or areas of necessary improvement to control costs. This can take the form of budgetary controls, standard costing or inventory management.

Cost accounting can contribute to the preparation of requisite financial statements, an area otherwise reserved for financial accounting. The prices and information developed and studied through cost accounting are likely to make it easier to gather information for financial accounting purposes. For example, raw material costs and inventory prices are shared between both accounting methods.

Entrepreneurs and business managers rely on actionable information before making allocation decisions. Cost accounting buoys decision making because it can be tailored to the specific needs of each separate firm. This is different than financial accounting, where GAAP and international financial reporting standards (IFRS) regulate method and presentation.

RELATED FAQS
  1. What are the main advantages and disadvantages to the cost accounting method?

    Read a brief overview of the main advantages and disadvantages of the cost accounting method as it relates to business analysis ... Read Answer >>
  2. What are the objectives of financial accounting?

    Learn about the principle objectives of financial accounting, including the furnishing of the financial statements for those ... Read Answer >>
  3. How much will it cost to hire an accountant to do my taxes?

    Find out how much it costs to hire an accountant and what benefits and services you can expect from your accountant. Read Answer >>
  4. How does financial accounting help decision making?

    Read a brief overview of some areas where financial accounting helps in decision making for investors, lending institutions ... Read Answer >>
  5. What does it mean when the shares in my account have been liquidated?

    An account liquidation occurs when the holdings of an account are sold off by the firm in which the account was created. ... Read Answer >>
  6. How does financial accounting differ from managerial accounting?

    Learn about the main differences between financial accounting and managerial accounting, including why one is highly uniform ... Read Answer >>
Related Articles
  1. Financial Advisor

    Financial Accounting

    Financial accounting is the process of gathering, recording, summarizing and reporting financial data relating to a business. The ultimate goal is to accurately report the financial picture and ...
  2. Personal Finance

    Career Advice: Accountant Vs. Controller

    Learn about the differences between controllers and accountants, how the two are related and which is the best career choice for aspiring bookkeepers.
  3. Managing Wealth

    Accounting Research Manager: Job Description & Average Salary

    Learn about the average salary of an accounting research manager as well as the necessary skills, experience and education, and licenses to hold this position.
  4. Personal Finance

    Career Advice: Financial Analyst Vs. Accountant

    Read an in-depth comparison between a career as a financial analyst and a career as an accountant, including how to determine which is best for you.
  5. Personal Finance

    Handling High-Yield Savings Accounts

    Is this the savings route for you? Read on to find out what these accounts have to offer.
  6. Investing

    The Importance Of Analyzing Accounts Receivable

    While investors often focus on revenues, net income, and earnings per share, they should not overlook the importance of analyzing accounts receivable.
  7. Investing

    Accounting Basics

    What is accounting? Learn the basics of this essential way of recording and summarizing financial information.
  8. Investing

    What are Accounting Principles?

    The term accounting principles refers to rules and guidelines companies use to help them record their business and financial transactions.
  9. Personal Finance

    What Management Accountants Do

    If you like keeping track of a company's income and expenses but also want to hold a position with significant responsibility and authority, management accounting could be the job for you.
RELATED TERMS
  1. Certified Management Accountant - CMA

    An accounting designation whose holder has formally demonstrated ...
  2. Account Analysis

    1. In cost accounting, this is a way for an accountant to analyze ...
  3. Push Down Accounting

    In accounting for mergers and acquisitions, the convention of ...
  4. Accounting Standard

    An accounting standard is a principle that guides and standardizes ...
  5. Accounting Theory

    Assumptions, methodologies and frameworks used in the study and ...
  6. Accounting Information System - AIS

    The collection, storage and processing of financial and accounting ...
Hot Definitions
  1. Drawdown

    The peak-to-trough decline during a specific record period of an investment, fund or commodity. A drawdown is usually quoted ...
  2. Inverse Transaction

    A transaction that can cancel out a forward contract that has the same value date.
  3. Redemption

    The return of an investor's principal in a fixed income security, such as a preferred stock or bond; or the sale of units ...
  4. Solvency

    The ability of a company to meet its long-term financial obligations. Solvency is essential to staying in business, but a ...
  5. Dilution

    A reduction in the ownership percentage of a share of stock caused by the issuance of new stock. Dilution can also occur ...
  6. Agency Problem

    A conflict of interest inherent in any relationship where one party is expected to act in another's best interests. The problem ...
Trading Center