Running a successful business requires overseeing many moving parts, one of the most important being its costs. This is where accounting for cost (commonly referred to as cost accounting) comes into play.
This is an internal process that helps identify how a company can reduce spending. Our team at Founder’s CPA will explore cost accounting and provide you with information to spot red flags so you can boost profitability.
Cost accounting definition
Cost accounting consists of recording, analyzing and reporting on the costs of a company. This method is used to help identify where a company is spending money as well as where it’s being wasted or lost altogether. It pulls elements from input analysis, traditional bookkeeping, system development, and creating measurable information. Many businesses use it as a way to measure their strategy and to maximize profitability.
Whether you’re a business manager or entrepreneur, you may use cost accounting to compile actionable information before determining where to allocate funds. Of course, the specifics of cost accounting are malleable to the ins and outs of the specific firm.
Understanding the concept and use cases
There are many areas of business that can benefit from cost accounting. We’ve outlined some examples.
Internal costs
This concept can apply to internal costs including transfer prices for companies that transfer goods and services across subsidiaries or divisions. One example is a parent company that is based overseas that supplies inventory to a U.S. subsidiary. As a result, the U.S. company is charged by the parent company when they purchase materials.
Expansion plans
Any company that wants to expand into additional products needs to first understand their cost structure. In this case, cost accounting can help management better prepare for future expenditures including large equipment or plant purchases.
Cost controls
Accounting for cost also applies to cost controls. Ideally, firms will spend less on their inputs and increase how much they charge for outputs. Cost accounting can help pinpoint inefficiencies and apply improvements to get the desired results. Examples of these controls can be budgetary controls, standard costing, and inventory management.
Preparing financial statements
Required financial statements are easier to prepare with cost accounting. It outlines the prices and information developed so it’s faster to gather information for financial accounting. Examples include inventory prices or raw material costs that are shared between accounting methods.
Types of cost accounting
The industry a business is in can determine the types of costs it incurs. We’ve outlined a few examples of common costs in cost accounting.
- Direct costs: Directly linked to the production of a product and usually includes direct materials, labor, and distribution costs
- Indirect costs: Cannot be directly tied to product production and may include factory electricity.
- Variable costs: These costs increase or decrease with production volume.
- Fixed costs: The costs that keep a company running and remain the same regardless of sales and production volumes.
- Operating costs: The costs to run the company’s day-to-day operations.
Founder’s CPA is here to help
It’s important for company management to understand how to use their resources more effectively. Another way to do that is to partner with the right team. At Founder’s CPA, our team offers industry leading accounting, tax and CFO services. Contact us today to see how we can help!
