by Juan Leer

Created on: May 25, 2008

When people hear the phrase "cost accounting," not a lot comes to mind. But what exactly is cost accounting, and why is it so important in the accounting field? Simply put, cost accounting provides information for management accounting and financial accounting.

Cost accounting measures, analyzes, and reports financial and nonfinancial information relating to the costs of acquiring or using resources in an organization. Typically, modern cost accounting has the perspective that collecting cost information is a function of the management decisions being made. For that reason, cost accounting is very similar to management accounting.

The key word here is "cost," so how exactly is that defined by accountants? They see it as a resource sacrificed or foregone to achieve a specific objective. Usually, a cost is measured in terms of the monetary amount that must be paid to acquire goods and services. There are two types of costs actual costs and budgeted costs. Actual costs are those costs which are incurred, while budgeted costs are the predicted or forecasted costs for a certain project.

Cost accounting helps managers to make decisions about the company, and then decide what products are going to be most profitable. That is why it is so important to know how much something (referred to as a cost object) costs. Usually, costs are measured in two different stages. The first stage is the cost accumulation stage, which refers to the collection of cost data in some organized way by means of an accounting system. The second stage is cost assignment, which encompasses both the tracing of accumulated costs that have a direct relationship to a cost object and the allocation of costs that have an indirect relationship to the cost object.

Essentially, the purpose of cost accounting is to account for the costs of certain objects and products, which allow managers to make better decisions about their companies. Cost accounting helps not only to assign costs after they are used, but also to forecast how much costs will be used, which helps with analysis and forecasting. There are many different ways that this type of analysis is done, often depending on the types of objects. For example, a cost accounting system for byproducts will be different than the cost accounting system for a main product. Cost accounting can be very in depth and technical, but it is vitally important if a company wants to be successful and as profitable as they can be.

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