Cost accounting is a technique used to determine the best financial course of action. The primary purpose of cost accounting is to help decision-makers make decisions. By analyzing the cost of products, services, and projects, accountants can advise businesses of the best course of action regarding a particular transaction. To put it more simply, you calculate the elements of cost for product process (raw materials, labor, and expenses/overhead), compare that cost with the product price, determine the business’s revenue, and decide if and where savings are needed.

 

Cost accounting doesn’t have a singular approach. Cost accounting methods include:

  • Standard cost accounting – allows decision makers to determine general fixed costs and primarily focus on variable costs
  • Lean Accounting – created to support lean manufacturing, analyzes waste and motivates improvements by identifying trouble spots in production
  • Activity-based costing – allocates the cost of production by analyzing the activities it takes to complete the product
  • Resource consumption accounting – relatively new to the accounting world, resource consumption accounting focuses on scope of resources, quantity-based modeling, and cost behavior analysis. The <a href=https://rcainstitute.org>RCA Institute</a> has defined it as a “management accounting approach that provides managers with enterprise optimization information by combining the learning, proven application, and sound decision support principles that permeate management accounting’s rich history.”
  • Thoughtput accounting – another newer method, throughput accounting identifies that elements of business that prevent a company from excelling and determines how to overcome those obstacles
  • Life-cycle assessment – businesses analyze the environmental impact through the “life-cycle” of a product to determine how the product affects the environment and how to minimize that effect
  • Environmental accounting – calculate the cost of remediating any environmental impact that results from production
  • Target costing – determining the maximum cost a business can incur and still receive a desired profit, the entire cost of a product’s life-cycle is calculated