Editorial Note: We earn a commission from partner links on Forbes Advisor. Commissions do not affect our editors' opinions or evaluations. Show
Knowing how much your business spends is a key component of accounting. After all, if you don’t have this information on hand, it will be difficult to determine whether you’re making a profit. That’s where cost accounting comes in. It revolves around the costs associated with running your business. What Is Cost Accounting?Cost accounting is a type of managerial accounting that focuses on the cost structure of a business. It assigns costs to products, services, processes, projects and related activities. Through cost accounting, you can home in on where your business is spending its money, how much it earns and where you might be losing money. Managers and employees may use cost accounting internally to improve your business’s profitability and efficiency. Elements of Cost AccountingThere are a few key elements of cost accounting, listed below. Direct and Indirect Materials Materials are usually divided into two groups: direct and indirect. Direct materials are directly integrated into a finished product. Cotton in clothing and wood in furniture are a few examples of direct materials. Indirect materials, on the other hand, are used in the production process but can’t be tied to a specific product, such as glue, gloves and tape. Direct Labor Labor refers to any wages to employees which relate to a specific aspect of producing products or delivering services. Wages can include salaries, hourly rates, overtime, bonuses and employee benefits. Overheads Overheads are costs that relate to ongoing business expenses that are not directly attributed to creating products or services. Office staff, utilities, the maintenance and repair of equipment, supplies, payroll taxes, depreciation of machinery, rent and mortgage payments and sales staff are all considered overhead costs. Types of Cost AccountingThere are several types of cost accounting. Find the breakdown of each type below. Standard Cost AccountingStandard cost accounting is a traditional method for analyzing business costs. It assigns an average cost to labor, materials and overhead evenly so that managers can plan budgets, control costs and evaluate the performance of cost management. Many small businesses prefer standard cost accounting due to its ease and simplicity. Activity-based Cost AccountingActivity-based accounting (ABC) assigns overhead costs to products and services to give you a better idea of what they cost. Compared to standard cost accounting, ABC dives deeper into the cost of manufacturing a product or providing a service. It can help explain which activities increase production costs. Marginal Cost AccountingAlso known as marginal costing, marginal cost accounting reveals the incremental cost that comes with producing additional units of goods and services. With marginal cost accounting, you can identify the point where production is maximized and costs are minimized. Lean AccountingLean accounting is designed to streamline accounting processes to maximize productivity and quality. It eliminates unnecessary transactions and systems, reducing time, costs and waste. You can use it to understand what creates the most value for your customers and how you can continuously improve. Life Cycle AccountingLife cycle accounting examines the cost of producing a product from start to finish so you know how much you’ll spend on it over its useful life. It can come in handy if you’d like to choose between two or more assets, understand the benefits of an asset and budget more accurately. Cost Accounting vs. Financial AccountingCost accounting is specifically intended for managers and employees who are a part of your business and responsible for making important decisions. It can help them improve operations and increase profitability. Financial accounting, on the other hand, is designed to help shareholders, lenders, regulators and other parties who don’t have access to your internal information. It takes a business’s financials and presents them in a way that showcases how it’s doing in terms of assets, liabilities and shareholders’ equity. Cost Accounting SoftwareThe reality is cost accounting is complex and tedious. By automating it with cost accounting software, you can save time and money. NetSuite is one example of software that offers cost accounting capabilities. It’s versatile, customizable and integrates easily with a variety of other tools your business may already be using. Learn more about it with our NetSuite review. Bottom LineNo matter your industry, cost accounting is essential for your internal team. It will help you record and analyze the costs of products in services so that you can operate smoothly and grow your business. If you don’t have the time or expertise to handle your accounting manually, get the help you need with one of the best accounting software systems for small businesses. Frequently Asked Questions (FAQs)What is the purpose of cost accounting?Cost accounting can give your business detailed insight into how your money is being spent. With this information, you can better budget for the future, reduce inefficiencies and increase profitability. What is the main difference between cost accounting and financial accounting?Financial accounting is governed by regulators and must comply with the generally accepted accounting principles (GAAP) or International Financial Reporting Standards (IFRS). Cost accounting, however, doesn’t have to abide by these regulations since it’s used internally. Is QuickBooks the best accounting software?QuickBooks is one of the most popular accounting software programs on the market and while it is one of the best options, it’s not necessarily the best for every business. For example, while QuickBooks is very robust, it may involve a steeper learning curve and come at a higher cost than competitors–especially for businesses that want to use its payroll features. For more information, check out our QuickBooks Online review. Which system is used in financial accounting?The accrual method of financial accounting is a method of preparing financial statements that records transactions independently of cash usage.
What is costing in financial accounting?Costing is any system for assigning costs to an element of a business. Costing is typically used to develop costs for customers, distribution channels, employees, geographic regions, products, product lines, processes, subsidiaries, and entire companies.
Which costing is used in cost accounting?Cost accounting considers all input costs associated with production, including both variable and fixed costs. Types of cost accounting include standard costing, activity-based costing, lean accounting, and marginal costing.
Is cost accounting a financial system?Cost accounting is a form of a managerial accounting system designed to evaluate company costs for the purpose of improving productivity and increasing profit. Business owners who focus on the cost aspect of business can better understand how to reduce costs and increase profitability.
|
