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What is cost accounting?

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Last editedMay 20212 min read

There are many different types of accounting, but one of the most important is cost accounting. So, what is cost accounting? Falling under the managerial accounting bracket, cost accounting is essential for businesses, providing vital insight into how funds are used in relation to production.

What does cost accounting involve?

Essentially, cost accounting looks at costs to help determine what is needed to break even and profit. Cost accounting considers the following costs to get a clear image of a company’s finances:

Fixed costs: This can include a mortgage or cost of utilities, they do not fluctuate
Variable costs: Costs related to production, like supplies, material, and labour that can change

By understanding how a business makes and spends its money, directors can make fully informed decisions about maintaining, scaling back, or growing the business. In times of economic uncertainty, historical cost accounting may be used. Using a historical cost, accounting can be carried out based on the historical value of an asset, rather than its current cost (if it isn’t stable).

Unlike financial accounting, which aims to create financial statements that can be distributed externally, cost accounting is more concerned with internal management. Because of this, cost accounting can be carried out in a way that best suits the nature of the business.

What is the difference between cost and management accounting?

Cost and management accounting exist in the same category, in the sense that cost accounting is a type of management accounting. Cost accounting does not need to follow strict regulations. However, an accountant carrying out management accountancy will need to have a strong understanding of the standards that guide other areas of accountancy.

Cost accounting methods

There are several ways an accountant might carry out cost accounting:

Standard costing system: This is when an average cost is assigned to each direct cost, i.e., costs that directly impact the final product (materials, labour, etc.). This method is relatively simple, making it a popular option for small businesses.
Activity-based accounting: Calculates fixed and variable costs in proportion to the product line’s direct cost.
Throughput accounting: Concentrates on the idea that a company’s efficiencies can be improved. This type of cost accounting doesn’t focus on expenses, but the company’s overall goals.
Cost-volume-profit (CVP) analysis: Calculates fixed and variable costs based on how many products are produced. Using this model, a cost accountant can then find the production level at which a company will break even.

Do you need an accountant to do cost accounting?

While it is not impossible for a company to run its own cost accounting without an accountant, it’s not advised. An accountant will have the training and knowledge to carry out processes and give advice on how the company can improve its finances. Cost accounting is a form of management accounting, but there are many routes into this career path. A complete CIMA qualification isn’t always the benchmark for finding a competent cost accountant.

How much does an accountant cost?

The average salary of a cost accountant can vary greatly. Asking ‘how much does an accountant cost?’ is unlikely to give an accurate answer, as other areas of accountancy have their own salary expectations. Generally, it will depend on an accountant’s qualifications and experience, but a fully qualified chartered management accountant will command a salary that reflects the extensive period of study and competency that the CIMA requires.

In terms of cost accounting, smaller companies might find contractors more cost effective. Accountants that come from a consultancy firm can be hired on an hourly or per-project basis, rather than kept on as full-time staff. If you’re outsourcing to a contractor, you can call in professional accounting services at select times, such as when the fiscal end draws to a close.

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