Cost accounting is a special branch of accounting that helps businesses analyse their internal costs. It supports decision-making by tracking, recording and analysing every expenditure related to production, operation or services. While financial accounting focuses on external reporting, cost accounting looks at internal reporting; helping businesses determine pricing, improve efficiency and manage budgets.
It is important to understand cost accounting methods and techniques for any cost management system. These tools guide organisations in assessing performance, reducing waste and making better plans.
Methods of Cost Accounting
Standardised procedures called cost accounting methods determine the production costs and service expenses during delivery. A business must select its accounting method by considering both, its structure and production type alongside its need for precise cost data.
Job Costing
- Applies when products or services are customised
- Costs are assigned per individual job or contract
Each job creates an individual separate unit for cost tracking in job costing. The costs of materials together with labour expenses and indirect costs get specifically linked and billed to particular work orders under job costing. Different production sectors utilising this cost method include construction sites as well as consulting, film production companies and event management firms.
Process Costing
- Suitable for continuous, mass production processes
- Costs are averaged over identical units produced
Process costing applies specifically to products that are identical with no distinguishable differences between them. Production stages serve as individual distinct procedures for this method. The collection of costs per department is later divided by the number of units, which gives the average cost per unit. Common in food, chemical and textile industries.
Activity-Based Costing (ABC)
- Allocates overhead based on actual activities and cost drivers
- Helps identify high-cost activities and inefficiencies
ABC assigns indirect costs more precisely by using multiple cost drivers (like machine hours, labour hours, or inspections). This method is useful in complex manufacturing and service sectors where overheads are a large part of total costs.
Marginal Costing
- Focuses on variable costs only
- Fixed costs are treated as period costs
Marginal costing helps in decision-making processes like pricing, product mix and cost-volume-profit analysis. It identifies the contribution margin per unit and is useful when assessing the profitability of additional output.
Absorption Costing
- Includes all fixed and variable costs in product pricing
- Complies with accounting standards like GAAP and IFRS
Also known as full costing, this method considers direct materials, labour and a portion of fixed overheads in the cost of each product. Though less helpful for internal decisions, it is essential for external reporting and inventory valuation.
Techniques of Cost Accounting
While methods help determine cost structure, techniques offer tools to analyse and improve it. Cost accounting methods and techniques together enable deeper insights and informed strategies.
Standard Costing
- Uses pre-determined costs as benchmarks
- Variances are tracked and analysed
In standard costing, expected costs for labour, materials and overhead are established. Any difference between standard and actual cost is analysed. This technique promotes cost control and efficiency improvements.
Budgetary Control
- Compares actual performance with budgeted figures
- Enables early detection of variances and corrective actions
Organisations prepare functional budgets across departments. As actual performance is measured against these budgets, management can pinpoint inefficiencies and reallocate resources accordingly.
Variance Analysis
- Breaks down cost differences into specific causes
- Measures performance deviations and operational efficiency
Variance analysis goes hand in hand with standard costing and budgetary control. It evaluates why actual results deviate from planned ones—whether due to price, quantity, or efficiency—and helps managers implement timely corrections.
Life Cycle Costing
- Looks at total costs over a product’s life span
- Ideal for long-term planning and innovation investments
This technique includes R&D, design, production, marketing, operation, maintenance and disposal costs. It’s useful in capital-intensive industries like aerospace, automotive and IT, where long-term cost implications matter.
Target Costing
- Price-driven cost management strategy
- Ensures profitability by designing products to meet cost targets
Instead of calculating costs and then setting a price, target costing begins with a competitive market price. After deducting a desired profit margin, companies determine the target cost and work backwards to engineer the product within that cost.
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Conclusion
People working in management accounting or financial decision-making need to be proficient in cost accounting methods and techniques. The choice of tools depends on three key factors: business type, complexity, and strategic priorities. Understanding the difference between cost accounting and management accounting is also important—while cost accounting focuses on tracking, recording, and analyzing costs, management accounting uses this information to support strategic planning and business decisions.
The construction firm obtains advantages from job costing systems and large-scale manufacturers gain benefits from process costing methods. Standard costing delivers good results when operations remain stable yet activity-based costing provides precise cost analysis for organisations handling diverse production needs.
Budgetary control together with variance analysis represents vital performance measurement tools on the technique level. Two strategic approaches such as target costing and life cycle, play a critical role by making cost planning both innovative and market responsive.
Ultimately, these frameworks are not just accounting practices; they’re decision-making aids. Businesses that effectively implement cost accounting methods and techniques are more agile, competitive, and financially resilient. Earning a CMA certification can help professionals master these skills and apply them effectively to drive better financial decisions.
FAQs on Cost Accounting Methods and Techniques
What academic background is ideal for becoming an investment banking analyst?
- A degree in finance, economics, accounting or business.
- Strong GPA and quantitative coursework are preferred.
- Certifications like CFA or CPA are helpful but optional.
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- Internships are crucial for gaining real-world experience.
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What essential skills do investment bankers need to succeed?
- Financial modelling and data analysis.
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In what ways can networking improve investment banking career prospects?
- Helps you access hidden job opportunities.
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