Cost accounting is a set of management accounting methods, techniques and procedures used mainly to determine actual or planned costs of cost objects (cost center, product, cost unit, department, process, activity).
Cost accounting is not an exact discipline. It involves a set of well tried-out methods or techniques, but very important in its application is also common sense.
Purpose of cost accounting
- Facilitate decision making
- Analyze product profitability – help mainly determine which products are profitable and which are not.
- Cost-plus pricing - setting appropriate price based on costs. It is one of the methods how to set up the selling price of the product. But this approach lacks commercial approach as the price based only on costs may not be competitive.
- Control over the costs
- Cost analysis is the starting point for cost reductions and optimization programs
- It is used in budget and forecast preparations and as the result, it can warn management about the costs spent above budget.
- Valuation of the inventory and cost of goods sold – help determine:
- which costs shall be included to the value of inventory (or costs of goods sold) and which shall be booked immediately to statement of profit and loss as period costs
- to which cost objects shall the costs be allocated
- the methodology for cost allocation and apportionment