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What Is Cost Accounting?

Understanding cost accounting.

  • Cost vs. Financial Accounting
  • Cost Accounting FAQs

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Cost Accounting: Definition and Types With Examples

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cost and management accounting 2 assignment

Cost accounting is a form of managerial accounting that aims to capture a company's total cost of production by assessing the variable costs of each step of production as well as fixed costs, such as a lease expense.

Cost accounting is not GAAP-compliant , and can only be used for internal purposes.

Key Takeaways

  • Cost accounting is used internally by management in order to make fully informed business decisions.
  • Unlike financial accounting, which provides information to external financial statement users, cost accounting is not required to adhere to set standards and can be flexible to meet the particular needs of management.
  • As such, cost accounting cannot be used on official financial statements and is not GAAP-compliant.
  • 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.

Investopedia / Theresa Chiechi

Cost accounting is used by a company's internal management team to identify all variable and fixed costs associated with the production process. It will first measure and record these costs individually, then compare input costs to output results to aid in measuring financial performance and making future business decisions. There are many types of costs involved in cost accounting , each performing its own function for the accountant.

Types of Costs

  • Fixed costs are costs that don't vary depending on the level of production. These are usually things like the mortgage or lease payment on a building or a piece of equipment that is depreciated at a fixed monthly rate. An increase or decrease in production levels would cause no change in these costs.
  • Variable costs are costs tied to a company's level of production. For example, a floral shop ramping up its floral arrangement inventory for Valentine's Day will incur higher costs when it purchases an increased number of flowers from the local nursery or garden center.
  • Operating costs are costs associated with the day-to-day operations of a business. These costs can be either fixed or variable depending on the unique situation.
  • Direct costs are costs specifically related to producing a product. If a coffee roaster spends five hours roasting coffee, the direct costs of the finished product include the labor hours of the roaster and the cost of the coffee beans.
  • Indirect costs are costs that cannot be directly linked to a product. In the coffee roaster example, the energy cost to heat the roaster would be indirect because it is inexact and difficult to trace to individual products.

Cost Accounting vs. Financial Accounting

While cost accounting is often used by management within a company to aid in decision-making, financial accounting is what outside investors or creditors typically see. Financial accounting presents a company's financial position and performance to external sources through financial statements , which include information about its revenues , expenses , assets , and liabilities . Cost accounting can be most beneficial as a tool for management in budgeting and in setting up cost-control programs, which can improve net margins for the company in the future.

One key difference between cost accounting and financial accounting is that, while in financial accounting the cost is classified depending on the type of transaction, cost accounting classifies costs according to the information needs of the management. Cost accounting, because it is used as an internal tool by management, does not have to meet any specific standard such as  generally accepted accounting principles (GAAP) and, as a result, varies in use from company to company or department to department.

Cost-accounting methods are typically not useful for figuring out tax liabilities, which means that cost accounting cannot provide a complete analysis of a company's true costs. 

Types of Cost Accounting

Standard costing.

Standard costing assigns "standard" costs, rather than actual costs, to its cost of goods sold (COGS) and inventory. The standard costs are based on the efficient use of labor and materials to produce the good or service under standard operating conditions, and they are essentially the budgeted amount. Even though standard costs are assigned to the goods, the company still has to pay actual costs. Assessing the difference between the standard (efficient) cost and the actual cost incurred is called variance analysis.

If the variance analysis determines that actual costs are higher than expected, the variance is unfavorable. If it determines the actual costs are lower than expected, the variance is favorable. Two factors can contribute to a favorable or unfavorable variance. There is the cost of the input, such as the cost of labor and materials. This is considered to be a rate variance.

Additionally, there is the efficiency or quantity of the input used. This is considered to be a volume variance. If, for example, XYZ company expected to produce 400 widgets in a period but ended up producing 500 widgets, the cost of materials would be higher due to the total quantity produced.

Activity-Based Costing

Activity-based costing (ABC) identifies overhead costs from each department and assigns them to specific cost objects, such as goods or services. The ABC system of cost accounting is based on activities, which refer to any event, unit of work, or task with a specific goal, such as setting up machines for production, designing products, distributing finished goods, or operating machines. These activities are also considered to be cost drivers , and they are the measures used as the basis for allocating overhead costs .

Traditionally, overhead costs are assigned based on one generic measure, such as machine hours. Under ABC, an activity analysis is performed where appropriate measures are identified as the cost drivers. As a result, ABC tends to be much more accurate and helpful when it comes to managers reviewing the cost and profitability of their company's specific services or products.

For example, cost accountants using ABC might pass out a survey to production-line employees who will then account for the amount of time they spend on different tasks. The costs of these specific activities are only assigned to the goods or services that used the activity. This gives management a better idea of where exactly the time and money are being spent.

To illustrate this, assume a company produces both trinkets and widgets. The trinkets are very labor-intensive and require quite a bit of hands-on effort from the production staff. The production of widgets is automated, and it mostly consists of putting the raw material in a machine and waiting many hours for the finished good. It would not make sense to use machine hours to allocate overhead to both items because the trinkets hardly used any machine hours. Under ABC, the trinkets are assigned more overhead related to labor and the widgets are assigned more overhead related to machine use.

Lean Accounting

The main goal of lean accounting is to improve financial management practices within an organization. Lean accounting is an extension of the philosophy of lean manufacturing and production, which has the stated intention of minimizing waste while optimizing productivity. For example, if an accounting department is able to cut down on wasted time, employees can focus that saved time more productively on value-added tasks.

When using lean accounting, traditional costing methods are replaced by value-based pricing  and lean-focused performance measurements. Financial decision-making is based on the impact on the company's total value stream profitability. Value streams are the profit centers of a company, which is any branch or division that directly adds to its bottom-line profitability.

Marginal Costing

Marginal costing (sometimes called cost-volume-profit analysis ) is the impact on the cost of a product by adding one additional unit into production. It is useful for short-term economic decisions. Marginal costing can help management identify the impact of varying levels of costs and volume on operating profit. This type of analysis can be used by management to gain insight into potentially profitable new products, sales prices to establish for existing products, and the impact of marketing campaigns.

The  break-even point —which is the production level where total revenue for a product equals total expense—is calculated as the total fixed costs of a company divided by its contribution margin. The contribution margin , calculated as the sales revenue minus variable costs, can also be calculated on a per-unit basis in order to determine the extent to which a specific product contributes to the overall profit of the company.

History of Cost Accounting

Scholars believe that cost accounting was first developed during the  industrial revolution  when the emerging economics of industrial supply and demand forced manufacturers to start tracking their fixed and variable expenses in order to optimize their production processes.

Cost accounting allowed railroad and steel companies to control costs and become more efficient. By the beginning of the 20th century, cost accounting had become a widely covered topic in the literature on business management.

How Does Cost Accounting Differ From Traditional Accounting Methods?

In contrast to general accounting or financial accounting, the cost-accounting method is an internally focused, firm-specific system used to implement  cost controls . Cost accounting can be much more flexible and specific, particularly when it comes to the subdivision of costs and inventory valuation. Cost-accounting methods and techniques will vary from firm to firm and can become quite complex.

Why Is Cost Accounting Used?

Cost accounting is helpful because it can identify where a company is spending its money, how much it earns, and where money is being lost. Cost accounting aims to report, analyze, and lead to the improvement of internal cost controls and efficiency. Even though companies cannot use cost-accounting figures in their financial statements or for tax purposes, they are crucial for internal controls.

Which Types of Costs Go Into Cost Accounting?

These will vary from industry to industry and firm to firm, however certain cost categories will typically be included (some of which may overlap), such as direct costs, indirect costs, variable costs, fixed costs, and operating costs.

What Are Some Advantages of Cost Accounting?

Since cost-accounting methods are developed by and tailored to a specific firm, they are highly customizable and adaptable. Managers appreciate cost accounting because it can be adapted, tinkered with, and implemented according to the changing needs of the business. Unlike the  Financial Accounting Standards Board (FASB)-driven financial accounting, cost accounting need only concern itself with insider eyes and internal purposes. Management can analyze information based on criteria that it specifically values, which guides how prices are set, resources are distributed, capital is raised, and risks are assumed.

What Are Some Drawbacks of Cost Accounting?

Cost-accounting systems ,and the techniques that are used with them, can have a high start-up cost to develop and implement. Training accounting staff and managers on esoteric and often complex systems takes time and effort, and mistakes may be made early on. Higher-skilled  accountants  and  auditors  are likely to charge more for their services when evaluating a cost-accounting system than a standardized one like GAAP.

Cost accounting is an informal set of flexible tools that a company's managers can use to estimate how well the business is running. Cost accounting looks to assess the different costs of a business and how they impact operations, costs, efficiency, and profits. Individually assessing a company's cost structure allows management to improve the way it runs its business and therefore improve the value of the firm. These are meant to be internal metrics and figures only. Since they are not GAAP-compliant, cost accounting cannot be used for a company's audited financial statements released to the public.

Fleischman, Richard K., and Thomas N. Tyson. "The Economic History Review: Cost Accounting During the Industrial Revolution: The Present State of Historical Knowledge." Economic History Review , vol. 46, no. 3, 1993, pp. 503-517.

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cost and management accounting 2 assignment

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ACCA study text 2.4 : Cost and management accounting II

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Cost & Management Accounting (Mgt-402) Assignment-1

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JV Company began its operations on January 1, 19A and produces one product that sells for Rs 7. Normal capacity is 100,000 units per year, with 100,000 units produced and 80,000 units sold in 19A. Manufacturing costs and marketing and administrative expenses were as follows:

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  • Module 1: Nature of Managerial Accounting — Assignment: Nature of Managerial Accounting
  • Module 2: Cost-Volume-Profit Analysis —  Assignment: Stocking Stuffers, Inc.
  • Module 3: Standard Cost Systems —  Assignment: BlueBlankets, Inc.
  • Module 4: Allocating Manufacturing Overhead — Assignment: Canoe, Co.
  • Module 5: Job Order Costing —  Assignment: Big Pots
  • Module 6: Process Costing — Assignment: Dino Catchers
  • Module 7: Budgeting for Operations — Assignment: RockChuck Company
  • Module 8: Short-term Decision Making — Assignment: RareTerra, Inc.
  • Module 9: Capital Investment Analysis — Assignment: Right Smart Bowling
  • Module 10: Responsibility Accounting — Assignment: Big Boats, Inc.

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  • Module 1: Nature of Managerial Accounting — Discussion: Recommendation to the Leadership Team
  • Module 2: Cost-Volume-Profit Analysis — Discussion: Restaurant Entrepreneurs
  • Module 3: Standard Cost Systems — Discussion: Cheesecake Factory
  • Module 4: Allocating Manufacturing Overhead — Discussion: Allocating Manufacturing Overhead
  • Module 5: Job Order Costing — Discussion: The Case of the Busted Blockbuster
  • Module 6: Process Costing — Discussion: Computer Tech
  • Module 7: Budgeting for Operations —  Discussion: Why Budget?
  • Module 8: Short-term Decision Making — Discussion: Supply and Demand
  • Module 9: Capital Investment Analysis — Discussion: Independent Forklift
  • Module 10: Responsibility Accounting — Discussion: Ben & Jerry’s
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Defining Default Account Assignments

After completing this lesson, you will be able to:

  • Introduce posting controls
  • Describe the account assignment settings
  • Create a default account assignment
  • Analyze the impact of the assignment during journal entry

Posting Controls

Meet Chris, an experienced management accounting employee at Bike Company SE. He's skilled at using SAP S/4HANA, having extensive knowledge of his department's processes and a comprehensive understanding of the company's operations. Apart from maintaining crucial applications that streamline work for others, Chris also acts as an administrator and business process configuration expert. He is the contact person for establishing and managing Overhead Cost Accounting processes within the company.

Chris loves discovering and utilizing new features and helping other users. Recently, Sarah, a colleague from the financial accounting department, sought his expertise for support and assistance. This is what they talked about:

Let’s now take a closer look at the tools that help streamline accounting data.

You'll learn how to define default values for cost assignment. In the next lessons, you will also delve into more sophisticated features like validation and substitution rules that can identify inconsistencies in account assignment objects and ensure precise postings.

We'll start with an in-depth exploration of the default account assignment.

Default Account Assignment

Application area.

The default account assignment is a tool that automatically proposes specific cost assignment objects, such as cost centers or profit centers during journal entry. You can determine which management accounting object is defaulted for each line item based on the combination of primary cost and revenue G/L account and company code.

As an example, consider recurring utility expenses, which should be charged to the Utilities cost center. For this purpose, a default account assignment can be established as shown in the figure below.

cost and management accounting 2 assignment

First, the cost element for Utilities for the relevant Company Code is connected to the respective cost center in the default account assignment configuration.

Now whenever you enter a utility expense in Financial Accounting, the system automatically proposes the Utilities cost center. You still have the option to manually overwrite the cost center if necessary.

This leads to a more efficient accounting workflow, as the account assignment object is entered automatically during the posting process, minimizing the need for manual input.

Default account assignments are especially useful when line items are automatically posted, such as when posting exchange rate differences and discounts in Financial Accounting, or price differences in Material Management.

In addition to cost centers, you can also indicate profit centers or profitability segments for allocating costs and revenues to.

In summary, the default account assignment establishes a default value for the controlling objects when posting costs or revenues, ensuring that these are automatically charged to the right entities.

Configuration

To configure a default account assignment, you perform the following steps:

cost and management accounting 2 assignment

  • For each cost assignment, enter the company code and the cost element that should be included in the account assignment.
  • Enter the corresponding account assignment object (cost center or profit center). If you want the system to determine a profitability segment instead, you can use the PrfSeg checkbox. This is used when transferring data, such as price differences, to Margin Analysis.
  • You have the option to specify detailed account assignments, which can be differentiated by valuation area or profit center. To do this, enter the following values in the "Acct assignmt detail" column: 1 for valuation area or 3 for profit center. Then select the corresponding entry in the Dialog structure on the left and enter the relevant cost assignment.

Define a Default Account Assignment

Overall benefits.

The default account assignment feature suggests default values for specific accounts, improving the accuracy of financial data and streamlining the process through automatic assignment. This reduces the likelihood of errors in manual data entry and saves a considerable amount of time that would otherwise be spent repeatedly assigning these costs.

Log in to track your progress & complete quizzes

COMMENTS

  1. COST AND MANAGEMENT ACCOUNTING II Assignment 2: CVP ANALYSIS

    COST AND MANAGEMENT ACCOUNTING II Assignment 2: CVP ANALYSIS Abera Abiy Pls Answer See Full PDF Download PDF COST AND MANAGEMENT ACCOUNTING II Assignment 2: CVP ANALYSIS 1. A firm has the following income statement for a month.

  2. Cost and Management Accounting II

    Students also viewed. Chapter 2. - cost and management accounting; Caunit 1pptpdf 231203074020 6505519 e; Cost 1 chapter one - cost; Cost and Management Accounting 2 Chapter 2

  3. Assignment on Cost and Managment Accounting

    The budget for this year was: direct materials $60,000, direct labor $30,000, and overhead $45,000. Actual costs for this year were: direct materials $50,000, direct labor $35,000 and overhead $45,000 is the over- or under-applied overhead for this year?

  4. Cost and Management Accounting 2 Textbook Solutions

    Select the Edition for Cost and Management Accounting 2 Below: Edition Name HW Solutions Join Chegg Study and get: Guided textbook solutions created by Chegg experts Learn from step-by-step solutions for over 34,000 ISBNs in Math, Science, Engineering, Business and more 24/7 Study Help. Answers in a pinch from experts and subject enthusiasts ...

  5. Cost and Management Accounting 2 Chapter 1

    These costs obligations that fall into the committed cost category. These costs are mainly fixed inare mainly fixed in terms of cost behavior and expire to become expenses in the form of amortiterms of cost behavior and expire to become expenses in the form of amortization andzation and depreciation. TYPES OF BUDGETS1.

  6. Cost Accounting: Definition and Types With Examples

    Cost accounting is an accounting method that aims to capture a company's costs of production by assessing the input costs of each step of production as well as fixed costs, such as depreciation of ...

  7. 2 ACFN 623 Advanced Cost and Management Accounting Assignment 2

    2 ACFN 623 Advanced Cost and Management Accounting Assignment 2 (2) - Free download as PDF File (.pdf), Text File (.txt) or read online for free. Scribd is the world's largest social reading and publishing site.

  8. ACCA study text 2.4 : Cost and management accounting II

    ACCA study text 2.4 : Cost and management accounting II by Chartered Association of Certified Accountants. Publication date 1990 Publisher London : BPP Publishing Collection inlibrary; printdisabled; internetarchivebooks Contributor Internet Archive Language English. Access-restricted-item true Addeddate 2021-10-29 06:05:50 Boxid

  9. Cost Accounting: A Managerial Emphasis

    Find step-by-step solutions and answers to Cost Accounting: A Managerial Emphasis - 9780133803815, as well as thousands of textbooks so you can move forward with confidence. ... The Manager and Management Accounting. Exercise 1. Exercise 2. Exercise 3. Exercise 4. Exercise 5. Exercise 6. Exercise 7. Exercise 8. Exercise 9. Exercise 10. Exercise ...

  10. (PDF) Cost & Management Accounting II

    p> For more course tutorials visit www.uoptutorial.com ACC 310 Week 1 DQ 1 Information for Decision Making and Cost Concepts and Behavior ACC 310 Week 1 DQ 2 Fundamentals of Cost-Volume-Profit ...

  11. Cost and Management Accounting 3A

    Cost and Management Accounting 3A - Assignment 2 - Free download as PDF File (.pdf), Text File (.txt) or read online for free. good for reference

  12. CMGT-ICBASG-QP-2020.v1 1 .pdf

    CMGT-ICBASG-QP-2020.v1 Page 1 of 16Cost and Management Accounting (CMGT) ICB ASSIGNMENTS 1 &2& 3 QUESTION PAPER Apr 2020 to Mar 2021 THIS PAPER CONSISTS OF 3 ASSIGNMENTS ASSIGNMENT 1: 4 QUESTIONS ASSIGNMENT 2: 4 QUESTIONS ASSIGNMENT 3: 6 QUESTIONS INSTRUCTIONS: 1.

  13. Cost & Management Accounting (Mgt-402) Assignment-1

    Cost & Management Accounting (Mgt-402) Assignment-1 sana hussain JV Company began its operations on January 1, 19A and produces one product that sells for Rs 7. Normal capacity is 100,000 units per year, with 100,000 units produced and 80,000 units sold in 19A. Manufacturing costs and marketing and administrative expenses were as follows:

  14. Cost and Management Accounting Part Ii (Acfn2092)

    Module Cost and Management Accounting ETCTS Credits 5 Credit Hour 3 Course Objectives & Competences to be Acquired After successfully completing this course, the students should be able to: ... Assignment Tutorial Attendance Final exam Total Weight 35% 5% 60% 100% . iv . v

  15. CMA02B2

    Cost and Management Accounting (CMA02B2) 2 days ago. Evaluate the key ethical issues in the 4Ps model of the marketing mix. 100 - 200 words. Guidelines. 1. Make sure that you have carefully read and fully understood the question before answering.

  16. Cost assignment definition

    Cost assignment is the allocation of costs to the activities or objects that triggered the incurrence of the costs. The concept is heavily used in activity-based costing, where overhead costs are traced back to the actions causing the overhead to be incurred. The cost assignment is based on one or more cost drivers.

  17. Cost and Management Accounting 2 Chapter 2

    1. Determine the range of activity the budget should cover (because cost behavior patterns may be different in different ranges of activity) 2. Determine the cost and revenue behavior pattern for each cost included in 3. Select the activity levels for which budgets will be prepared. 4.

  18. Assignments

    You can view them below or throughout the course. Module 1: Nature of Managerial Accounting — Assignment: Nature of Managerial Accounting Module 2: Cost-Volume-Profit Analysis — Assignment: Stocking Stuffers, Inc. Module 3: Standard Cost Systems — Assignment: BlueBlankets, Inc. Module 4: Allocating Manufacturing Overhead — Assignment: Canoe, Co.

  19. Assignment 2

    View Homework Help - Assignment 2 - Accounting Cost and Management from ACT 2131 at Universiti Putra Malaysia. Cost and Management Accounting (ACT2131) Assignment 2 Group Members: Nur Alya Zulaikha

  20. Defining Default Account Assignments

    Application Area. The default account assignment is a tool that automatically proposes specific cost assignment objects, such as cost centers or profit centers during journal entry. You can determine which management accounting object is defaulted for each line item based on the combination of primary cost and revenue G/L account and company ...

  21. Unit 13, assignment one: cost and management accounting:

    Unit 13, assignment one: cost and management accounting: - In this report, I shall be exploring - Studocu Unit 8 - ass 1 - these documents are for BTEC business level 3 In this report, I shall be exploring absorption and marginal costing techniques and how they are used for decision making.

  22. Cost And Management Accounting Assignment

    Once you've completed the Cost and management accounting assignment, make sure that you have time set aside to review it before handing it in so that there are no mistakes. Live Chat Support 2 ...

  23. Top Online MBA Programs Of 2024

    This brings the total cost of an online MBA to between $12,750 and $97,200. According to NCES data, tuition and fees for graduate programs at public colleges cost $11,554 on average, or around ...

  24. Finance worker pays out $25 million after video call with ...

    A finance worker at a multinational firm was tricked into paying out $25 million to fraudsters using deepfake technology to pose as the company's chief financial officer in a video conference ...

  25. 3-2 Assignment-Costing Methods (ACC 202 Managerial Accounting)

    3-2 Assignment: Costing Methods Rebecca Coleman ACC 202-Managerial Accounting. Southern New Hampshire University. Company Overview: The company I selected to analyze and choose a costing method that bests fits their business activities, processes, and services they offer is Family Powersports, located in San Angelo, TX. I chose this company because not only are they located throughout Texas ...

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    0 likes, 0 comments - assignment_help_singapore on January 19, 2024: " ️Here's what sets us apart from the competition ️ Professional Assignment Writing Serv ...

  27. Management Accounting II Assignment

    19637447 Bakery Project Cost. Accounting. Tutorial work. 100% (6) Comments. Please sign in or register to post comments. Students also viewed. American Apparel ACC 7101; Assignment 4 - TVM SEM 2 21-22; ... MA III - Assignment - Management accounting assignement ; Audit Assignment Report (Fraud Case)