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What is cost accounting

When did cost accounting appear?

The principles of accounting arose from the beginning of commercial activities in order to facilitate the process of measuring profits, and since the thirteenth century, where Pacioli is the first to work on the development of the system of bookkeeping and is attributed to the origins of cost accounting.

Cost accounting later witnessed many developments, the most important of which was during the industrial revolution, which forced companies to track their fixed and variable expenses in order to improve their production processes, until cost accounting became one of the most important topics in business management by the twentieth century.
What is cost accounting
What is cost accounting

Accordingly, the emergence of cost accounting was associated with the beginning of commercial activities due to the business need for it in order to track its expenses.

What is cost accounting?

Cost accounting is a form of management accounting that is used to determine the total cost of production for a company by evaluating the costs of each of the variable production steps in addition to fixed costs, such as rental expenses.

Therefore, cost accounting is the accounting that is used to meet the needs of management by taking into account all the variable and fixed costs.

What are the types of cost accounting?

What are the types of cost accounting
What are the types of cost accounting

There are four main types of cost accounting - each of which has a specific use - which is: standard cost accounting, activity-based cost accounting, lean accounting, and marginal cost accounting, and the following is an explanation of these types:

Standard Cost Accounting

Standard costing is one of the types of cost accounting that is based on determining the standard cost instead of the actual cost, so it depends on the efficient use of labour and materials used in the production of goods and services, for example, a company expected to produce 400 products, but work was done to produce 500, so under standard costing the cost of materials will be higher because the total quantity produced increases.
Actual cost accounting is an accounting system used by manufacturers in order to determine the difference between the actual costs and the expected costs of producing these goods, which is known as the variance. This type is useful for planning purposes by knowing the difference between the actual and expected cost and looking for the reasons that led to such differences.

Cost accounting based on

Activity Activity-Based Costing is used by relying on activities, as this type of cost accounting considers activities as a cost driver, so any event, work or task is a cost driver, such as setting up production machines, designing products and operating machines. For example, Cost accountants distribute a questionnaire in a company in order to calculate the time workers need on their tasks, which in turn gives a better picture of spending time and money.

Activity-based cost accounting is a method used to estimate costs by identifying the various activities of an organization and the time it takes to allocate costs to them.

lean accounting

Lean Accounting is known as Lean Accounting, and it is one of the types of cost accounting that aims to improve financial management practices within organizations, as it aims to increase production, improve productivity and reduce waste, for example: If the accounting department can reduce wasted time, employees can Then focus on saving time and exploiting it in order to increase productivity.

Lean accounting relies on some principles and processes that provide feedback that improves organizations' work and productivity.

Marginal cost accounting

Marginal cost accounting is called (cost-volume-profit analysis) as a result of the impact of the cost of the product by adding one additional unit in production. Most departments use this type with new products by setting sales prices for them and studying the impact of marketing campaigns on them.

Marginal cost accounting is used to determine the type of cost to which variable costs are assigned to a product, while fixed costs are considered as period costs.

Accordingly, all types of cost accounting are used in order to determine costs, whether variable or fixed, which are related to the production process, to be used later in order to measure financial performance and make future business decisions.

What are the advantages of cost accounting?

Cost accounting is used to make business-related decisions because it shows where these costs have been incurred, and cost accounting offers many advantages. The following are the characteristics of cost accounting:
  • Efficiency Measuring and Improving: Making comparisons and analyzes that enable the business to measure its efficiency in order to maintain it and work to improve it.
  • Distinguish between profitable and unprofitable activities: Cost accounting shows profit-making and loss-making activities, by comparing the cost of each product or function to the price obtained.
  • Determining the appropriate price: Cost accounting works to determine the appropriate price for the product. If the price is high, this leads to no orders for the product, and if the price is low, this will lead to a loss.
  • Correct planning: Cost accounting contributes to obtaining detailed information that helps in the correct planning of the business.
  • Control of materials: the availability of information related to the availability of materials such as stock helps in planning production and use of correct materials in order to avoid their loss due to negligence or embezzlement.
  • Increased production: Cost accounting provides the appropriate information related to costs, through which it is possible to determine the possibility of increasing production or not.
  • Determining the reasons for profit or loss: The cost accounting system is used to accurately reveal the reasons that lead to profits or losses, in addition to helping to distinguish between necessary and unnecessary expenses and losses.
  • Verifying the accuracy of financial accounts: by reconciling the profits shown by cost accounting and financial accounting, the definition of financial accounting will be clarified later.

Accordingly, cost accounting is one of the types of accounting that provides many advantages and facilities that contribute to making financial decisions.

What are the main objectives of cost accounting?

There are several objectives of cost accounting, which are to verify the cost, fix the selling price, record cost data in a correct manner, in addition to ensuring profits, with the aim of assisting management in making the right decisions. The following are the most important objectives of cost accounting:
  • Cost Verification: Cost accounting aims to ascertain the cost per unit of a product that is manufactured.
  • Providing information: Cost accounting aims to provide the required data that contributes to determining the prices of manufactured products.
  • Profit verification: Cost accounting is used to ascertain the profitability of products and to provide advice that contributes to increasing these profits.
  • Inventory Control: Cost accounting is used in controlling the inventory of raw materials, materials to be manufactured, and finished materials.
  • Planning: Cost accounting provides data after analyzing the cost of materials to management in order to assist in financial planning and performance evaluation.
  • Budget preparation: Cost accounting contributes to preparing the budget and verifying control over it.
  • Determining the cost of profit or loss: where the costs of products and services are determined and the revenue generated from their sale is determined in order to determine the cost of profit or loss.
  • Making financial decisions: Using the data provided by cost accounting, financial decisions are made such as the introduction of new products.

Therefore, determining the cost of one unit that is presented is one of the most important objectives of cost accounting, which in turn contributes to determining the financial capacity of organizations.

What is the difference between cost accounting and financial accounting?

Financial accounting is defined as the accounting that displays the company’s financial position and performance and is used by investors or external creditors, and this is the difference between cost accounting and financial accounting, where cost accounting is used by management in order to help companies make decisions related to their business, and regarding There are many differences between cost accounting and financial accounting:

the differences Cost accounting Financial Accounting
Users Administration. External users such as investors and creditors.
Report typeManagement determines what information should be included in these reports. The reports follow generally accepted accounting principles.
The nature of the information you provide Detailed information such as information related to production lines. Information related to the financial position of the organizations.
Included costs It includes the cost of raw materials, materials in work and finished inventory. The costs are included within the financial report on the balance sheet.
Regulatory frameworks There is no regulatory framework governing cost accounting.Generally Accepted Accounting Principles or International Financial Reporting Standards.
time timeReports are submitted at the end of the financial period in addition to providing future forecasts.Reports are submitted at the end of the financial period.

Therefore, the difference between cost accounting and financial accounting is that cost accounting focuses on management decisions, while financial accounting focuses on the issuance of financial statements to external parties.
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