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Cost Accounting is an accounting process that aims at keeping track of the costs of production of a company. Raw material costs at each stage of production along with depreciation on capital equipment are estimated. Production costs are assessed and tracked individually. Thereafter forecasts or estimates are compared with actual performance for the purpose of variance analysis.

From the variance analysis management would be able to gauge how the company has performed financially. Companies use cost accounting to complement their decision support system which is absolutely vital. A group of investors would be more interested in financial accounting rather than cost accounting. Financial accounting represents costs and financial performance through the balance sheet of a company.

Management is infinitely benefited because of cost accounting as it aids and abets management in preparing budgets and agendas for controlling costs. The resultant positive effect is on net margins which are greatly improved with prospective effect. Cost Accounting could also be aptly defined as an accounting methodology that gather, categorize and record activities related to fulfilling a task.

Analysis of the synopsis of the data is done to determine a selling price or possible savings. In comparison with financial accounting where economic performance is measured in monetary terms, in cost accounting money is considered as an aspect of production-related to the economy. Cost accounting at one time was used in manufacturing only.

In this day and age, the service industry uses cost accounting as well. With regard to management accounting, the role of cost accounting is to ascertain budget, real operational cost, processes, departments or products and variance analysis of profits or how funds are used socially.

Cost accounting is used by management to complement decision-making for the purpose of cutting costs and thereby enhancing profits. It’s a type of management accounting that is exempt from following the standards of generally accepted accounting principles. The varied cost or management accounting approaches are:

  • standardized or standard cost accounting
  • lean accounting
  • activity-based costing
  • resource consumption accounting
  • throughput accounting
  • marginal costing or cost-volume-profit analysis

Fixed costs unlike variable costs are fixed always and do not vary based on volume. Gradually fixed costs have become extremely crucial for managers. All of the costs related to:

  • maintenance
  • tooling
  • production control
  • purchasing
  • quality control
  • storage and handling
  • plant supervision and
  • engineering

for example are fixed costs. In recent times fixed costs, as opposed to variable costs, have gained in importance. Allocation or apportionment of fixed costs to a wide array of products could lead to faulty decision-making. So that decision-making regarding products and pricing is accurate and effective, managers should be conversant with fixed costs. 

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