what is cost accounting 
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 cost accounting is not gaap compliant and can only be used for internal purposes investopedia theresa chiechiunderstanding cost accountingcost 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 each performing its own function for the accountant cost accounting vs financial accountingwhile cost accounting is often used by management within a company to aid in decision making financial accounting is what outside investors or creditors typically see financial accounting presents a company s financial position and performance to external sources through financial statements which include information about its revenues expenses assets and liabilities cost accounting can be most beneficial as a tool for management in budgeting and in setting up cost control programs which can improve net margins for the company in the future one key difference between cost accounting and financial accounting is that while in financial accounting the cost is classified depending on the type of transaction cost accounting classifies costs according to the information needs of the management cost accounting because it is used as an internal tool by management does not have to meet any specific standard such as generally accepted accounting principles gaap and as a result varies in use from company to company or department to department cost accounting methods are typically not useful for figuring out tax liabilities which means that cost accounting cannot provide a complete analysis of a company s true costs types of cost accountingstandard costing assigns standard costs rather than actual costs to its cost of goods sold cogs and inventory the standard costs are based on the 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 has to pay actual costs assessing the difference between the standard efficient cost and the 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 considered to be a rate variance additionally there is the efficiency or quantity of the input used this is considered to be 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 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 refer to 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 for example cost accountants using abc might pass out a survey to production line employees who will then account for the amount of time they spend on different tasks the costs of these specific activities are only assigned to the goods or services that used the activity this gives management a better idea of where exactly the time and money are being spent to illustrate this assume a company produces both trinkets and widgets the trinkets are very labor intensive and require quite a bit of hands on effort from the production staff the production of widgets is automated and it mostly consists of putting the raw material in a machine and waiting many hours for the finished good it would not make sense to use machine hours to allocate overhead to both items because the trinkets hardly used any machine hours under abc the trinkets are assigned more overhead related to labor and the widgets are assigned more overhead related to machine use 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 