Cost accounting is a facet of management accounting that determines the actual cost associated with manufacturing a product or providing a service by assessing the variable costs of each step of production as well as fixed costs. It is done for the purpose of budget preparation and profitability analysis. The information derived from this process is useful to managers in determining which products, departments or services are most profitable and which ones need improvement. So, 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 involves determining fixed and variable costs. Fixed costs are expenses that recur each month regardless of the level of production. Examples include rent, interest on loans and lease expenses. Variable costs are expenses that fluctuate with changes in production level, such as cost of raw material, labor, and maintenance expenses. These costs are related to production in that the more units of a product produced, the more expense there is associated with the materials and labor that went into making the product.

Operating costs are expenses associated with day-to-day business activities but are not traced back to one product. They are different from the cost of sales because operating expenses cannot be linked directly to the production of the products or services a company sells. Operating costs can be variable or fixed. Common operating costs may include rent, equipment, inventory costs, marketing, payroll, insurance, and funds allocated for research and development.

Direct costs are costs specifically related to producing a product. A direct cost can be traced to the cost object, which can be a service, product, or department. Any cost that’s involved in producing a product, even if it’s only a portion of the cost that’s allocated to the production facility, are included as direct costs. Some examples of direct costs are direct labor, direct materials, manufacturing supplies, wages for the production staff and fuel or power consumption. Direct costs are often variable costs, meaning they fluctuate with production levels such as inventory.

Indirect costs, on the other hand, are expenses unrelated to producing a good or service. An indirect cost cannot be easily traced to a product, department, activity, or project. For example, with a car manufacturer, the direct costs associated with each vehicle include tires and steel. However, the electricity used to power the plant is considered an indirect cost because the electricity is used for all the products made in the plant. No one product can be traced back to the electricity bill.

Cost accounting is primarily used as a decision-making tool for individuals in charge of business operations. Managers use standardized methods to control cost in order to meet the desired level of profitability. Cost Accountants therefore are also known as Management Accountants. They collect and analyse all financial information for use by the management of the organization they work for. While most cost accountants work in government organizations or large companies, some will work as consultants either through public accounting firms or their own independent practice. Private consultants will often be called upon to perform services for small or mid-sized businesses that cannot substantiate the full-time employment of a cost accountant.

Junior Accountant: Career Pathway

• Junior Accountant
• Cost and Management Accountant
• Internal Auditor
• Statutory Auditor
• Advisor/Consultant

The Junior Accountants collaborate with other accountants and financial staff in the company to provide financial and accounting support to executives and department heads who establish goals and budgets for the organization. Their duties include:

• Collecting and analyzing data about the company’s operational costs.
• Setting standard costs of manufactured goods.
• Developing and analyzing cost standards.
• Carrying out cost-volume-profit (CVP) analysis.
• Establishing costs of business processes such as administration, labor, shipping, etc.
• Providing data for stable budget developments.
• Performing account reconciliations.
• Preparing audit reports and presenting their findings to management.
• Recommending changes to the company’s processes and policies to reduce cost and maximize profit.
• Advising executives and upper management on appropriate costing based on financial data.
• Supporting other company accountants with capital expenditure.
• Evaluation of potential business ventures.
• Prepare (monthly, quarterly and annual) cost forecasts