Cost Accounting: An Overview

While managerial accounting focuses on the sales and revenue of a product, cost accounting is concerned with the financial ins and outs of making the product. By examining a business’ internal processes and the costs of things like raw materials, labor, building and vehicle maintenance, energy and other considerations, cost accountants can provide information to help companies resolve pricing and budgeting questions, and enable it to operate at maximum profitability.

Why is this form of accounting important? Businesses need to use various internal accounting techniques to determine how much money they’re really making, what their costs are and to identify activities that are profitable or unprofitable. When equipped with this information, management can take steps to trim unprofitable activities or expand the ones that are beneficial.

Though they may sound like similar things, the biggest difference between cost and financial accounting is that a cost accountant’s work is typically intended for a company’s internal management team. Conversely, the statements compiled in financial accounting, summarizing the company’s revenues, expenses, assets and liabilities, provide a comprehensive look into a company’s finances as a whole, and are intended for external audiences like shareholders, creditors and regulators.

Because cost accounting is an internal process, it can be organized according to the needs of management and is not required to meet the same standards that financial accounting is. For example, it doesn’t have to comply with Generally Accepted Accounting Principles (GAAP).

As we know, a typical day for a cost accountant is centered around collaborating with other accountants and financial staff to provide company leadership accurate financial insight and information so they can make better decisions in regard to the production of a product.

Depending on the size and type of organization, the day-to-day tasks of a cost accountant may include:

The types of costs that cost accountants typically work with include ones that are directly and indirectly related to the production of a company’s products or services. They also encompass costs that are both fixed and variable:

Internal finance and management teams use various types of cost accounting to enable well-informed decision making. By determining costs per unit, the value of assets, how variations in production levels affect the company’s profitability and other metrics, they can gain a deeper understanding of the ways in which costs affect their bottom line.

Based on the company’s production under typical operating conditions, this cost accounting approach centers around the standard costs for inventory and the cost of goods sold (COGS). Companies use this approach to assess whether the standard cost and the actual cost are comparable or if there are variations that emerge.

With the potential to paint a more accurate picture of the total cost of a product and its profitability, this approach relies on a company’s cost drivers, assigning costs based on those rather than a generic measurement.

Used to make short-term financial decisions rather than plan for the future, this type of cost accounting assesses the potential profitability of new products and looks at the sale pricing for existing products. This approach allows management to measure the impact of different volume levels and costs based on the company’s operating profit.

To remain competitive and profitable, it’s in companies’ best interests to try to reduce waste and maximize productivity. In lean costing, value-based pricing is applied to production costs as an alternative to standard or historical costing.

As business leaders strive to determine whether they’re meeting their profitability goals and controlling costs, accountants utilize cost accounting formulas to unlock insights into profitability, efficiencies, break-even points and other metrics for their decision making.

When a company’s sales have covered its total production costs, that’s the break-even point. At this point, the company hasn’t made or lost money on the product, it’s just broken even.

Break-even (in units) = total fixed costs / contribution margin

This metric determines the incremental profit earned for each unit a company sells after its variable costs have been deducted.

Contribution margin = sales revenue – variable costs

If a manufacturer wants to set a profitability goal for a product in a given accounting period, this formula helps them determine how many units they’ll need to sell to achieve that goal.

Unit volume to achieve target net income = (fixed costs + target net income) / (contribution margin per unit)

The gross margin is the amount of money a company has left after it sells a product and deducts the COGS from their net sales. The higher the gross margin, the more the company has earned.

Gross margin = (net sales revenue – COGS) / net sales revenue

This metric assesses the variance between a product’s predetermined cost and its actual cost. When the actual cost is less than the predetermined cost, the variance is favorable. But if actual costs are greater, the variance is unfavorable.

Price variance = (actual unit cost – standard unit cost) x number of items purchased

To pay for business purchases, a company must earn enough revenue to cover the cost of the items it purchases, plus the tax it is required to pay on that income.

Pre-tax dollars needed for purchase = cost of item / (1 – tax rate)

If you’re considering pursuing a career in accounting, keep in mind there are some well-defined milestones along the path, including education, work experience, certification and licensure requirements.

Your first objective will be to earn an accounting degree. According to occupational data from the U.S. Bureau of Labor Statistics, accountants and auditors typically need a bachelor’s degree in accounting or business to enter the field, though some employers may prefer to hire applicants who’ve earned a master’s degree.

Here at DeVry, we offer a variety of accounting degree and certificate programs at the undergraduate and graduate levels that can help you prepare to pursue a career in accounting.

Our online Bachelor’s Degree in Accounting program is a great way to get started on this career path, familiarizing you with the foundations of accounting and economics that can be applied across industries.

If you’ve already completed a bachelor’s degree and want to continue to sharpen your skills, change careers or prepare to pursue management-level roles, a Master’s Degree in Accounting or an MBA with a Specialization in Accounting might be a good fit for you.

Cost accountants often need to earn certification at some point in their careers. This can be either the Certified Public Accountant (CPA)¹ or the Certified Management Accountant (CMA) certification.

At DeVry, our Graduate Certificate in Accounting Certification Preparation can be a tool you use to prepare to pursue one of these certifications. When you choose the Certified Management Accountant (CMA) Exam Preparation Emphasis in this online program, you’ll be immersed in a curriculum that concentrates on strategic financial management, financial planning and performance evaluation while you prepare for the CMA Exam.

Professional experience is an important building block in any career, and accounting is no exception. Beginning with an internship or entry-level employment, work experience means more than just moving up the ladder. Your work experience is yours– unique to your abilities, preferences and your personal and professional goals. As you acquire experience in an entry-level role, you will learn how to transfer your accounting skills from the classroom to the workplace. You may also acquire new skills as you adapt to your employer organization’s structure, methods and routines. 

Along with your personal work experience, you will also be building industry experience as you keep pace with the organizations, people, innovations and trends that contribute to the vibrancy of the field you work in. Even at the earliest stages of your journey, you’ll be acquiring the skills and experiences to build an impressive resume. As noted by the BLS, accounting professionals like cost accountants can rise through the ranks to become management accountants, budget directors, or other high-level roles.

Another benefit of experience is the people you encounter along your career journey. You have the potential to build a robust network of professional contacts who may provide guidance or mentorship, helping to further propel your career advancement.

If you’re thinking about pursuing a career in accounting or advancing in the accounting career you already love, we can help. 

Our online Bachelor’s Degree in Accounting program can help you develop knowledge and skills in financial accounting, critical thinking, auditing, accounting information systems, federal income taxation and other essential disciplines. Coursework includes elements of Becker Professional Education’s industry-leading content, exposing you to today’s relevant accounting principles. 

If you’ve already earned a bachelor’s degree, consider advancing your accounting education by earning a Keller Master of Science in Accounting, Master of Accounting and Financial Management, Master of Business Administration with a Specialization in Accounting, Graduate Certificate in Accounting and prepare to pursue the CMA or CPA certifications¹ by enrolling in our Gradate Certificate in Accounting Certification Preparation.

These graduate-level Accounting programs have received specialized Accounting accreditation² by the Accreditation Council for Business Schools and Programs (ACBSP) www.acbsp.org.

Online learning with DeVry and Keller can help you balance your commitment to education with work, family and other aspects of your busy life. A wide range of scholarship and grant opportunities may help make your education more affordable.