What Is Cost Accounting?

(Definition And
Objectives)
Written by

Updated 4 March 2025

Cost accounting provides information to business managers on the cost or profit of specific
aspects of its operations. It helps provide detailed information that financial accounting may not
be able to furnish. If you are interested in pursuing cost accounting professionally, understanding
more about it can help you decide if you are a good fit for this line of work. In this article, we
examine what is cost accounting, what its primary goals are and how it differs from other
accounting disciplines.Related: 9 Commonly Accepted Accounting Principles
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What Is Cost Accounting?

The answer to the question "What is cost accounting?" is that it is a part of a managerial
information system that uses past, present and future financial data to help managers in decision
making. According to the Institute of Cost and Works Accountants of India, cost accounting is
the technique and process of ascertainment of costs. Cost accounting or accounting for costs
begins with recording expenses and ends with preparing statistical data. Under cost accounting,
accountants use multiple techniques like marginal costing, standardised costing and rational
protocols to arrive at fixed and variable costs.Fixed costs are static expenses that recur monthly
and are not dependent on production levels. Examples of fixed costs include rental or leasing
costs, equipment depreciation or interest payments on loans. Expenses that change in proportion
to production expenses are variable costs. Examples include supplies, materials, labour and
equipment maintenance costs. In cost accounting, a company's internal management compares
the costs to output results like production or sales, while measuring the company's financial
health and making decisions that can affect the future of the business.Related: What Are The
Functions Of Accounting? (Definition And Types)

What Are The Objectives Of Cost Accounting?

The primary goals of cost accounting are to determine, classify and allocate expenditure that a
business incurs on materials, wages and other operational costs. These are the primary objectives
of cost accounting:
Cost ascertainment

The primary goal of cost accounting is to ascertain the cost of production for every process,
department or service of a business. Costing refers to the technique of ascertaining cost.
Accountants accumulate every expense and classify and analyse them to generate costing
information. They can generate the cost of a product or service at the end of production or
determine its cost during the production phase.Related: What Is Cost Unit? (Definition,
Calculation and Examples)

Cost control

Controlling the cost of production is another primary goal of cost accounting. Accountants study
the various operations and processes used to manufacture a product. They compare the budgets
allotted for material, labour and overheads, and compare it with actual expenses. The differences
and variances help management to evaluate whether costs are within control and, if not, how
they can control it.

Cost reduction

A company may want to reduce costs without impacting the quality of its products or services.
They may use new technologies, improve product design, improve the production process, fix
wastage or try innovative marketing strategies. Cost accounting helps management choose a
cost-effective method to permanently reduce the unit cost of goods without diminishing their
quality.Related: What Is Implicit Cost And Explicit Cost? (With Examples)

Profit ascertainment

Cost accounting ascertains the profitability of every product or service that a business offers. It
also helps compare profits over previous years and identify which products and services are more
profitable. Accountants then compare profitability predictions with actual profits. Accounting
reports provide profitability predictions and the management uses this information to maximise
profitability.

Rational pricing

A producer fixes a product's price based on the total cost of production, demand, supply and
margin of profit they want to make. Cost accounting gives the producer detailed and complete
information about the composition of the cost that can help them determine their selling price. If
there is inflation, depression or recession, cost accounting guides a producer on curtailing and
reducing cost of production to decide the minimum selling price.

Providing a basis for decision-making

Cost accounting provides information about the gross-profit analysis, cost-volume-profit

relationship, the break-even point for sales and differential costing. Management uses this
information to take important production-related decisions. This may include introducing or
discontinuing a product or service, optimising production capacity, selecting a profitable sales
strategy or exporting goods at a lower price.

Statutory compliance

Statutory compliance is another goal of cost accounting. As per government guidelines, it is

mandatory for companies that produce certain goods or provide certain services to include cost
accounts in their book of accounts. Also, companies with an aggregate turnover above a specific
income ceiling submit their cost accounts to the government for filing taxes.Related: Basics Of
Accounting - Terminology, Principles And Concepts

What Are The Benefits Of Cost Accounting?

Cost accounting is important for maintaining profitability. Cost accounting traces its origins to
manufacturing industries, but service-based businesses also implement cost accounting to avail
its benefits. The benefits of cost accounting include:

Accurate profit analysis

Cost accounting methods aim to consider every cost that a business operation incurs. The
company's top-most decision-makers can see which costs contribute to the company's profits and
which do not. Through the process, cost accounting helps to show whether the business can earn
more than their total expenditure towards producing goods or services.

Improved business strategy

The management of a business often requires a comprehensive view of the company's financial
situation to formulate effective business strategies. Knowing where profit margins are falling
short helps in deciding where to trim extraneous costs and increase the efficiency of resource
utilisation. Management can then effectively make decisions regarding future actions to decrease
costs or increase profits.Related: 11 Important Accounting Concepts And What They Mean

Appropriate budgeting

Previous accounting statements can look at how the inflation of costs and revenues is impacting
business. This information is crucial while making estimations for future revenue and expenses.
By reviewing estimations, a company's decision-makers can accurately determine whether they
can alter pricing strategies and other production costs.

Systematic return on investment

The break-even point is the number of units a company requires to sell to match or exceed the
total production costs. Accountants identify this by considering the total costs incurred in the
business's operation. Cost accounting is an effective record-keeping practice to track costs and
revenue, to identify a company's current break-even point.
Reduced overhead costs

Overhead costs are indirect expenditures that a business incurs. These costs can include
insurance, utilities, contingencies, advertising, administrative expenses and any logistical
expenses that indirectly contribute to the company's operating cost. Separating the direct and
indirect costs makes it easier to create reduction strategies for each type of expenditure.Related:
What Is Fixed Cost Formula? (Definition and Examples)

What Are The Major Differences Between Cost Accounting

And Management Accounting?
Cost accounting gathers and analyses information related to costs. Management accounting
prepares reports using qualitative and quantitative information. Cost accounting is a subset of
management accounting. Apart from these major differences, additional differences between cost
accounting and management accounting are:

 While the purpose of cost accounting is to ascertain cost and profitability of goods and
services, management accounting aims to aid management in long-term, strategic
decision making.
 Cost accounting prevents businesses from spending beyond their budgeted amounts.
Management accounting provides an overall picture of current and potential business
positions to develop strategies and action plans.
 While cost accounting considers matters related to cost and expenses, management
accounting has a wider scope that can impact multiple business aspects like attrition,
productivity, performance and efficiency.
 Cost accounting uses historical information to aid decision-making processes, while
management accounting uses historical and predictive data to aid decision-making
processes.
 Cost accounting may be a mandatory requirement for certain types of businesses, while
there is no statutory requirement for a business to include management accounting in
bookkeeping.
 Accountants can measure the outcome of cost accounting quantitatively, while
management accounting outcomes are qualitative.
 Information from cost accounting is crucial for management, external stakeholders,
investors and the government. Management accounting information and reporting
primarily benefits the management of a company.
 Cost accounting may not depend on management accounting, but management
accounting relies heavily on cost and financial accounting.

Related: How Much Does A CMA Make? (With Skills And Requirements)

What Are The Differences Between Cost Accounting And

Financial Accounting?
There are many important differences between cost accounting and financial reporting. The basic
difference is that while cost accounting aids management decisions, financial accounting aims at
providing financial information to external stakeholders like investors and government agencies.
Additional differences between cost accounting and financial accounting are:

 Local and global accounting bodies set standard practises and procedures for financial
accounting and reporting. In contrast, a cost accountant can prepare reports in any format
or include only information that the management requires.
 A financial accountant may classify a cost based on the type of transaction, while a cost
accountant may classify a cost based on the information required by the management.
 Cost accounting accumulates and compiles the cost of material, labour and inventory, and
financial accounting uses this information in its year-end reporting.
 Accountants prepare financial accounting reporting during the end of the accounting
period. Cost accountants can prepare reports whenever the management requires them.
 Financial reporting covers information for the preceding year, while cost accounting can
cover past, present and future periods.
 Financial accounting focuses on reporting financial results and the overall financial
position of a business entity. Cost accounting can provide information for every
department, individual product, specific subsidiary or a branch in a particular part of the
world.