Cost Accounting
A branch of accounting focused on capturing and analyzing the costs of production to support internal management decisions.
What is Cost Accounting?
Cost accounting is a branch of accounting that records, classifies, and analyzes the costs of production and operations to support internal management decisions. Unlike financial accounting (which reports historical results to external stakeholders under GAAP), cost accounting is primarily for internal use and not governed by standardized reporting rules. Key cost accounting techniques include job costing (tracking costs to specific jobs or orders), process costing (averaging costs across continuous production), activity-based costing (assigning costs based on activities that drive them), and standard costing (comparing actual costs to predetermined benchmarks). Cost accounting provides the data needed for pricing, budgeting, variance analysis, and make-or-buy decisions.
Example
A custom furniture manufacturer uses job costing — a cost accounting method — to track costs for each client order. For a dining table order, it records $800 in direct materials (wood and hardware), $400 in direct labor (8 hours × $50/hour), and $240 in applied manufacturing overhead (8 hours × $30/hour overhead rate). Total job cost is $1,440. Setting a selling price of $2,200 yields a gross margin of 34.5%, helping management assess whether each job type is profitable enough to continue pursuing.