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  2. Management Accounting
  3. What is Cost Accounting? | Definition, Top Examples, Purpose

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. 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 cost 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 time and money is being spent. For example, 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. The main goal of lean accounting is to improve financial management practices within an organization. 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.

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 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. 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 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. 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 of business management. Investopedia uses cookies to provide you with a great user experience.

Management Accounting

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Login Newsletters. What is Cost Accounting? 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 needs of management. 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. Types of Costs. 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 their 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.

What is Cost Accounting? | Definition, Top Examples, Purpose

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. Variable cost is the exact opposite of fixed cost. Variable cost changes as per the increase or decrease of production units.

But even if the total variable cost changes, per unit cost per unit, remain same irrespective of changes in production units. For example, the cost of raw material is a variable cost. The total cost of raw material changes if the production increases or decreases. But per unit cost of raw material remains same even if the production increases or decreases.

In semi-variable costs, both components are present. Semi-variable costs are the combination of fixed costs and variable costs. This sort of wages will be called semi-variable wages. Cost accounting is much more than a cost statement. But still, cost accounting example will give us an idea about how to calculate the cost of sales per unit for a particular product —.

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