Cost accounting is a form of managerial accounting that aims to capture a company’s total cost of production by assessing the variable costs
of each step of production as well as fixed costs, such as a lease expense.
A cost accountant often works in the accounting department of a company to prepare financial records, such as cost analyzes and monthly
budget reports. A successful cost accountant has the excellent analytical skills necessary to manage vast amounts of numerical data to calculate profit margins and recommend ways for an organization to minimize their costs. They also need a keen eye for details to update information regularly into accounting software programs and spot inaccuracies.
Standard Job Description:
Cost Accountants are expected to be detailed oriented, knowledgeable on statistics, have strong problem-solving skills, work comfortably under pressure and deliver on tight deadlines.
Cost accounting is used by a company’s internal management team to identify all variable and fixed costs associated with the production process. It will first measure and record these costs individually, then compare input costs to output results to aid in measuring financial performance and making future business decisions. There are many types of costs involved in cost accounting, which are defined below.
Types of Cost Accounting
1. Standard Costing. Standard costing assigns “standard” costs, rather than actual costs, to its cost of goods sold (COGS) and inventory. The standard costs are based on an efficient use of labor and materials to produce the good or service under standard operating conditions, and they are essentially the budgeted amount. Even though standard costs are assigned to the goods, the company still must pay actual costs.
Assessing the difference between the standard (efficient) cost and actual cost incurred is called variance analysis.
If the variance analysis determines that actual costs are higher than expected, the variance is unfavorable. If it determines the actual costs are lower than expected, the variance is favorable. Two factors can contribute to a favorable or unfavorable variance. There is the cost of the
input, such as the cost of labor and materials. This is a rate variance. Additionally, there is the efficiency or quantity of the input used. This is a
volume variance. If, for example, XYZ company expected to produce 400 widgets in a period but ended up producing 500 widgets, the cost of materials would be higher due to the total quantity produced.
2. Activity-Based Costing. Activity-based costing (ABC) identifies overhead costs from each department and assigns them to specific cost objects, such as goods or services. The ABC system of cost accounting is based on activities, which is any event, unit of work, or task with a specific goal, such as setting up machines for production, designing products, distributing finished goods, or operating machines. These activities are also considered to be cost drivers, and they are the measures used as the basis for allocating overhead costs.
Traditionally, overhead costs are assigned based on one generic measure, such as machine hours. Under ABC, an activity analysis is performed where appropriate measures are identified as the cost drivers. As a result, ABC tends to be much more accurate and helpful when it comes to
managers reviewing the cost and profitability of their company’s specific services or products.
3. Lean Accounting. The main goal of lean accounting is to improve financial management practices within an organization. Lean accounting is an extension of the philosophy of lean manufacturing and production, which has the stated intention of minimizing waste while optimizing productivity. For example, if an accounting department is able to cut down on wasted time, employees can focus that saved time more productively on value-added tasks.
When using lean accounting, traditional costing methods are replaced by value-based pricing and lean-focused performance measurements. Financial decision making is based on the impact on the company’s total value stream profitability. Value streams are the profit centers of a company, which is any branch or division that directly adds to its bottom-line profitability.
4. Marginal Costing. Marginal costing (sometimes called cost-volume-profit analysis) is the impact on the cost of a product by adding one additional unit into production. It is useful for short-term economic decisions. Marginal costing can help management identify the impact of varying levels of costs and volume on operating profit. This type of analysis can be used by management to gain insight into potentially profitable new products, sales prices to establish for existing products, and the impact of marketing campaigns.
The break-even point, which is the production level where total revenue for a product equals total expense, is calculated as the total fixed costs of a company divided by its contribution margin. The contribution margin, calculated as the sales revenue minus variable costs, can also be
calculated on a per unit basis in order to determine the extent to which a specific product contributes to the overall profit of the company.
Key Job Responsibilities:
1. Develop and maintain the cost accounting system, documents and records of the organization.
2. Plan budgets and prepare internal cost audits for multiple departments within a company.
3. Comply with Generally Accepted Accounting Principles (GAAP) for financial statements.
4. Analyze the data collected and log a detailed record of the results.
5. Determine and calculate formulas for fixed and variable costs, such as rent, insurance, and monthly purchases.
6. Review receipts and compare with actual charges to detect inaccuracies.
7. Project profit margins for upcoming quarters and analyze trends of highs and lows.
8. Prepare cost forecasts for monthly, quarterly, or annual operating schedules and recommend cost-effective improvements.
10. Analyze any changes in goods or services provided in order to determine what effect it has on the cost.
11. Analyze manufacturing costs and prepare regular reports comparing standard costs to actual production costs.
12. Make estimates of new and proposed product costs.
13. Provide management with reports that specify and compare factors that affect prices and profitability of products or services.
14. Assist in audits and general ledger preparation.
15. Conduct physical inventories and monitor the cycle count program.
1. Demonstrated understanding of Generally Accepted Accounting Principles (GAAP).
2. In-depth knowledge of accounting principles and best practices.
3. Familiarity with accounting software programs, such as FreshBooks and QuickBooks.
4. Computer literacy skills, especially with MS Excel and basic data entry and computation.
5. Expertise in activity-based costing for fixed and variable costs in relation to the overall direct cost of a line of products.
Bachelor’s degree in Accounting or related field (Example-B.Com/M.Com/ICWA/ MBA/ CA).
1. International Accounting Standards Board (IASB) accreditation
2. Certified Public Accountant (CPA) license
Financial Analyst, Forecasting, Budgeting, Financial Planning, Variance Analysis, Financial Control, Capital Budgeting, Cost Controller, Estimation, SAP, MIS, Cost Control, Costing, Cost, Cost Estimation, ERP, Cost Audit, Budgetary Control, CA, CMA.
1. Cost Analyst
2. Accounting Officer / Specialist
3. Bookkeeping Supervisor
4. Lean Accountant
Screening Questions/Assessment Parameters:
1. Types of methodologies used for Cost Accounting.
2. Experience in different types of cost accounting.
3. Experience in Cost Accounting tools.
4. Experience in Office 365.
1. Fixed costs are costs that don’t vary depending on the level of production. These are usually things like the mortgage or lease payment on a building or a piece of equipment that is depreciated at a fixed monthly rate. An increase or decrease in production levels would cause no change in these costs.
2. Variable costs are costs tied to a company’s level of production. For example, a floral shop ramping up their floral arrangement inventory for Valentine’s Day will incur higher costs when it purchases an increased number of flowers from the local nursery or garden center.
3. Operating costs are costs associated with the day-to-day operations of a business. These costs can be either fixed or variable depending on the unique situation.
4. Direct costs are costs specifically related to producing a product. If a coffee roaster spends five hours roasting coffee, the direct costs of the finished product include the labor hours of the roaster and the cost of the coffee beans.
5. Indirect costs are costs that cannot be directly linked to a product. In the coffee roaster example, the energy cost to heat the roaster would be indirect because it is inexact and difficult to trace to individual products.
5. Cost center. Cost centers are most often departments and profit centers that are largely responsible for company’s costs and income. Cost centers can be synchronized with dimensions in the general ledger. It is also possible to add new cost centers and define their own sorting with
6. Cost object. Cost objects are products, product groups or services of a company, the finished goods of a company, that in the end carry the costs. Cost objects can be synchronized with dimensions in the general ledger. It is also possible to add new cost objects and define their own
sorting with subtotals.
7. Cost allocation. Cost allocation is a process of allocating costs to cost centers or cost objects. For example, the wage of the truck driver of the sales department is allocated to the sales department cost center. It is not necessary to allocate the wage cost to other cost centers. Another example is that the cost of an expensive computer system is allocated to the products of the company that use the system.
8. Dynamic allocation. Dynamic allocations are dependent on changeable allocation bases, for example, the number of department employees,
or the sales revenue of the project within a certain period. There are nine predefined dynamic allocation bases that users can define by using five
9. Overhead cost. Overhead costs refer to ongoing expenses of operating a business. They are all costs on the income statement except for
direct labor, direct materials, and direct expenses. Overhead costs include accounting fees, advertising, depreciation, insurance, interest, legal fees, rent, repairs, supplies, taxes, telephone bills, travel, and utilities costs.
10. Step variable cost. Step variable costs are costs that change dramatically at certain points because they involve large purchases that cannot be spread out over time. For example, one employee can produce 100 tables in a month. The employee’s wage is constant over a production range of 1 to 100 tables. If the company wants to produce 110 tables, the company needs two employees. So the cost will double.
1. Cost of Goods Sold (COGS). Cost of Goods Sold are the expenses that directly relate to the creation of a product or service. An example of COGS would be the cost of Materials, or the Direct Labor to provide a service.
2. Gross Margin (GM). Gross Margin is a percentage calculated by taking Gross Profit and dividing by Revenue for the same period. It represents the profitability of a company after deducting the Cost of Goods Sold.
3. Cash Flow (CF). Cash Flow is the term that describes the inflow and outflow of cash in a business.
4. General Ledger (GL). A General Ledger is the complete record of a company’s financial transactions. The GL is used in order to prepare all of the Financial Statements.
5. Journal Entry (JE). Journal Entries are how updates and changes are made to a company’s books. Every Journal Entry must consist of a unique identifier (to record the entry), a date, a debit/credit, an amount, and an account code (that determines which account is altered).
6. Trial Balance (TB). Trial Balance is a listing of all accounts in the General Ledger with their balance amount (either debit or credit). The total debits must equal the total credits, hence the balance.
7. Liquidity. A term referencing how quickly something can be converted into cash.
8. Generally Accepted Accounting Principles (GAAP). These are the rules that all accountants abide by when performing the act of accounting.
9. Business (or Legal) Entity. This is the legal structure, or type, of a business. Common company formations include Sole Proprietor, Partnership, Limited Liability Corp (LLC), S-Corp and C-Corp. Each entity has a unique set of requirements, laws, and tax implications.
10. Income Statement (Profit and Loss) (IS or P&L). The Income Statement (often referred to as a Profit and Loss, or P&L) is the financial statement that shows the revenues, expenses, and profits over a given time period.