An Overview of Cost Accounting

Introduction

Cost accounting focuses on preparing, analyzing, and reporting information related to the cost of obtaining and using company resources. This article provides an overview of cost accounting and the tasks performed by cost accountants. Included will be definitions of common cost accounting terms.

Responsibilities of the Cost Accountant

The cost accountant is responsible for measuring and analyzing the various costs of production and distribution of company products. This involves the allocation of various types of costs, such as fixed costs, variable costs, direct costs, and indirect costs. These terms will be discussed later.

Cost accounting serves many purposes. The primary benefit is that proper tracking of costs helps the company establish ways to accomplish the following: 1) Reduce costs to boost revenue. 2) Lower prices to increase value for the customer.

Common Cost Accounting Terms

Fixed Costs - Fixed costs are costs that do not change over a specific time period. These costs remain constant regardless of changes in levels of volume or activity. For example, the lease payments on a manufacturing facility do not change with the level of production. This would be a fixed cost.

Variable Costs - Variable costs are costs that do change over a specific time period. These costs fluctuate proportionately with changes in levels of volume or activity. For example, the total cost of materials to manufacture appliances would increase as production increases and decrease as production decreases. This would be a variable cost.

Mixed Costs - Mixed costs are costs that contain characteristics of both fixed costs and variable costs. For example, product delivery costs include the cost of insurance on the delivery vehicle (fixed cost) and the cost of fuel (variable cost). This would be a mixed cost.

Direct Costs - Direct costs are costs that can be directly associated with a particular product. The direct association must be practical. For example, the cost of a rearview mirror can be directly associated with the vehicle that is being manufactured.

Indirect Costs - Indirect costs are costs that are associated with the product that cannot be directly associated in a practical manner. For example, the manufacturing supervisor salaries of a furniture company cannot be directly associated with the various types of furniture manufactured. These costs will be indirectly applied.

Period Costs - Period costs are costs that are not included in the cost of goods sold. These "costs are treated as expenses of the accounting period in which they are incurred because they are expected to benefit revenues in that period and are not expected to benefit revenues in future periods" (Horngren, Datar & Foster, p. 38).

Actual Costs - Actual costs are costs that have already occurred.

Budgeted Costs - Budgeted costs are costs that have been forecasted. These are future costs that have not yet occurred, so they may change.

Supply Chain - The supply chain is production process, including goods and services, from start to finish, that results in the product manufactured.

Melissa Bushman has published additional articles at Associated Content. Please click her name at the top of this page to view her other work.

References

Horngren, C. T., Datar, S. M., & Foster, G. (2006). "Cost Accounting. A managerial Emphasis." (12^th ed.). Upper Saddle River, NJ: Pearson Prentice Hall.