All kinds of organizations - manufacturing firms, service companies,
and nonprofit organizations - need some form of cost accounting, that
part of cost management system that measures costs for the purpose of
management decision making and financial reporting. Managers rely on
accountants to design a cost accounting system that measures costs to
meet each of the three purposes of a Cost Management Systems(CMS). The
role of the Cost Accounting Systems can not be denied in each and every
Cost Accounting is that part of the cost
management system that measures costs for the purpose of management
decision making and financial reporting. The cost accounting system
typically includes two processes:
1. Cost accumulation: Collecting
costs by some "natural" classification such as materials or labor, or
by activities performed such as order processing or machine processing.
2. Cost assignment: Tracing or allocating costs to one or more cost
objectives such as activities, processes, departments, customers, or
Cost: A sacrifice or giving up of resources for a particular
purpose, frequently measured by the monetary units that an organization
must pay for goods and services.
Cost object: Anything for which
decision makers desire a separate measurement of costs. Examples
include departments, products etc.
Direct costs: Costs that can be
identified specially and exclusively with a given cost objective in an
economically feasible way.
Indirect costs: Costs that can not be
identified specifically and exclusively with a given cost objective in
an economically feasible way.
Assigning indirect costs to cost objects using plausible and reliable
Unallocated costs: Costs for which we can identify no
relationship to a cost objective.
Product costs: Costs identified with
goods produced or purchased for resale.
Period costs: Costs that become expenses during the current period
without going through an inventory stage.
Cost pool: A group of
individual costs that a company allocating to cost objectives using a