A branch of accounting that records, classifies, analyzes, and allocates costs to products, services, or activities to help management make informed business decisions.
Cost Accounting goes beyond financial accounting by providing detailed cost information for internal decision-making. It identifies the cost of each product, process, department, or activity, enabling managers to control costs, set prices, evaluate profitability, and make strategic decisions. Key techniques include job costing, process costing, activity-based costing (ABC), standard costing, and marginal costing. Under the Companies (Cost Records and Audit) Rules, certain Indian companies must maintain cost records and undergo cost audits. Cost accountants (CMAs) are certified by the Institute of Cost Accountants of India.
A furniture company uses cost accounting to determine: Wood cost per chair: ₹800, Labor: ₹400, Overhead allocated: ₹200, Total cost: ₹1,400. Selling price: ₹2,200. Margin: ₹800 (36%). Analysis shows the 'Premium' line has 45% margin while 'Budget' line has only 12% — management decides to shift production focus.
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Financial accounting produces statements for external stakeholders (investors, regulators) following standards (Ind AS/IFRS). Cost accounting produces reports for internal management — it's flexible, detailed, and focused on cost control and decision-making. Financial accounting is mandatory; cost accounting is mandatory only for specified industries.
Companies engaged in manufacturing, mining, and processing with turnover exceeding prescribed thresholds (currently ₹50 crore for overall turnover or ₹25 crore for specific products) in industries specified by the government. The cost auditor must be a practicing CMA.
A costing method that allocates all manufacturing costs — both fixed and variable — to each product unit, also known as full costing.
A costing method that assigns only variable costs to products and treats all fixed costs as period expenses charged to the profit & loss account.
A costing method that assigns predetermined (standard) costs to products and then compares actual costs against these standards to identify and analyze variances.
A department, team, or function within a business that incurs costs but does not directly generate revenue.
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