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What is cost accounting?

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Quick Answer

Cost accounting is a type of managerial accounting that considers budgets and the cost to produce items. Managers use the results from cost accounting to make decisions that maximize profits while minimizing expenses, according to Reference.com.

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What is cost accounting?
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Full Answer

It is essential for a business to track its activities, regardless of the goods or services it provides, according to Wikipedia. Cost accounting provides data for managers to understand their operational costs. This field of accounting began during the industrial revolution as a way to improve the decisions of business owners and managers.

Early methods of cost accounting looked at variable costs, which are directly proportional to the amount of production and fixed cost, which remain the same, regardless of the amount of production. Reference.com indicates variable costs include wages and raw material while fixed costs include rent, insurance and the owner's salary. In order for a business to meet expenses, its income must equal or exceed the sum of the variable costs multiplied by the number of units produced and the fixed expenses.

In modern business practice, standard cost accounting is less useful to management than it was during the industrial revolution, according to Reference.com. Companies have fewer variable costs and equipment is more specialized and complex, making fixed costs a much larger part of the overall formula.

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