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 (i.e. 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.

(For related reading, see: What are the different types of costs in cost accounting?)

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. 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 >>
  6. How is market to market accounting different than historical cost accounting?

    Learn about historical cost accounting and mark to market accounting, the difference between and the limitations of the two ... Read Answer >>
Related Articles
  1. Personal Finance

    Accountant: Job Description & Average Salary

    Discover what the job description of an accountant entails, along with education and training, salary and skills necessary for success.
  2. Investing

    What is Accounting?

    Accounting is the recording of financial transactions of a business or organization. It also includes the process of summarizing, analyzing and reporting these transactions in financial statements.
  3. 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.
  4. Insights

    A Look At Accounting Careers

    More than just crunching numbers, this career blends detective work with trouble shooting.
  5. Managing Wealth

    Accounting Research Manager: Career Path & Qualifications

    Discover the basic responsibilities of an accounting research manager, the path this career usually takes and the qualifications needed for this career.
  6. Investing

    Financial History: The Rise of Modern Accounting

    How government regulation and the modern accounting profession grew hand-in-hand.
RELATED TERMS
  1. Cost Accounting

    Cost accounting is an accounting method that aims to capture ...
  2. Accounting

    The systematic and comprehensive recording of financial transactions ...
  3. Account Statement

    Account statement is a periodic summary of account activity with ...
  4. Accounting Practice

    An accounting practice is a routine manner in which the day-to-day ...
  5. Accountability

    Accountability is when an individual or department is held responsible ...
  6. Account History

    An account history is a record that keeps track of all activity ...
Hot Definitions
  1. Intrinsic Value

    Intrinsic value is the actual value of a company or an asset based on an underlying perception of its true value including ...
  2. Bubble

    1. An economic cycle characterized by rapid expansion followed by a contraction. 2. A surge in equity prices, often more ...
  3. Swap

    A swap is a derivative contract through which two parties exchange financial instruments, such as interest rates, commodities, ...
  4. Yield Curve

    A yield curve is a line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but ...
  5. Gross Profit

    Gross profit is the profit a company makes after deducting the costs of making and selling its products, or the costs of ...
  6. Risk Tolerance

    The degree of variability in investment returns that an individual is willing to withstand. Risk tolerance is an important ...
Trading Center