Definition of cost accounting

Cost/Management Accounting notes

In general, cost accounting is a field of accounting that measures, records and reports information about costs. It involves the comprehensive set of principles, methods and techniques to determine an appropriate analysis of costs to suit the various parts of organizational structure within the enterprise.
There is, however, no watertight definition for cost accounting. Various authorities and scholars have gone ahead to give their definitions. Some of the definitions include:

“That part of management accounting, which establishes budgets and standard costs and actual costs of operations, processes, departments or products and the analysis of variances, profitability or social use of funds.” (Chartered Institute of Management Accountants – CIMA).

“That which identities, defines, measures, reports and analyzes the various elements of direct and indirect costs associated with producing and marketing goods and services. Cost accounting also measures performance, product quality and productivity.” (Letricia Gayle Rayburn).
“A systematic process of collecting, summarizing and recording data regarding the various resources and activities in a firm so as to calculate the basis of production costs used in financial accounting or making other relevant decisions in a firm.” (Horngren C.T)

Cost accounting is broad and extends beyond calculating production costs for inventory valuation, which government-reporting requirements largely dictate. However, accountants do not allow external reporting requirements to determine how they measure and control internal organization’s activities. In fact, the focus of cost accounting is shifting from inventory valuation for financial reporting to costing for decision-making.

The main objective of cost accounting is communicating financial information to management for planning, evaluating and controlling performance, and to assist management to make decisions that are more informed. Its data are used by managers to guide their decisions.

From the definitions above, we can generally say that cost accounting is concerned with:

  •  Cost planning and cost control of activities of operations since it aims at improving efficiency by controlling and reducing costs
  • Resource allocation decisions, for instance, production, pricing and product costing
  • Performance measurement and evaluation of managerial performance; this is done through variance analysis, comparing actual output with the standard or budgeted output.
  • Formulation of overall strategies and long range plans; Cost accounting will be useful in forecasting

Cost accounting aims at providing useful information to decision makers to enable them make better decisions. It helps them in preparing various statements such as cash budgets and performance reports, cost data collection and application of costs to products and services.

Leave a Reply

Your email address will not be published. Required fields are marked *