Cost accounting is a method of accounting that focuses purely on a business’s costs – both fixed and variable. Using the cost accounting method, companies track all of their costs and allocate them to individual processes or units of production, allowing managers to better understand the economics of their business’s activities.
Cost accounting is especially important for businesses that manufacture and sell at scale and/or have diverse product lines, as these companies have many costs associated with manufacturing, packaging, and distributing their goods. For these types of businesses, accounting for costs is critical to accurately calculating profit margins, as well as budgeting, forecasting and identifying efficiencies.
More than other types of accounting, cost accounting gives companies a comprehensive view of their costs. Cost accounting tracks all of a company’s costs associated with its offerings and allocates them to specific products or activities. Whereas in financial accounting, costs appear as just one- or two-line items on a budget, cost accounting lets businesses break expenses down to see exactly what is driving costs. This can provide better insights into what the company can do to cut costs and increase profits.
After all, there are only two ways for companies to make more money: They can either increase sales (which is largely beyond their control), or they can cut costs (which they have greater control over).
What are the benefits of cost accounting?
Not only can you understand the total costs involved to produce your products, but it can be easier to spot instances of overcharging by vendors. Additionally, your company may be able to find efficiencies that allow you to save money.
Some of the benefits of cost accounting include the following:
Cost allocation: Managers can allocate costs by product line and per unit of production or hour of labor.
Profit drivers: Cost accounting helps business owners gain a deeper understanding of their profit margin and what drives it.
Budgeting and forecasting: Calculating costs for individual activities helps senior managers plan for future spending and forecast their finances into the future.
Cost savings: Using cost accounting, businesses may be able to identify new efficiencies to help save money.
Quicker decisions: Cost accounting can help managers respond quickly to changes in the market, such as when the cost of raw materials increases.
Additionally, cost accounting can also help business owners make sure they capture all of their tax-deductible expenses.