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Cost Accounting

In this article, we will learn in detail about the Cost Accounting system. Here, we understand the Cost Accounting system's meaning with objectives, elements, methods, or classification.

In today’s world, accounting is used in many fields of everyday life. In any organisation’s regulation process, many expenses occur daily, and many transactions are done every day. In this situation, the systematic management of money becomes very hard. And  Cost Accounting system is the systematic method that solves cost-related problems. It helps in handling the money flow of the organisation and facilitates smooth transactions. It is a part of financial management through which the financial department can handle the daily cost or expenses. It provides a good insight into the flow of money in the organisation. 

Cost Accounting System: Meaning 

The cost Accounting system is the systematic study of accounting in which the accountant includes every cost like goods cost, service cost, and manufacturing cost. In simple words, it is the strategic approach for facilitating the management of money, where transactions are held in big amounts. It helps in tracking the expenses of the organisation. The data collected through the Cost Accounting system can also be used in making financial decisions in the future. Along with this, this data also helps track the growth of an organisation.

Objectives of Cost Accounting System

The Cost Accounting System is a systematic approach to recording, monitoring, and summarising the total cost. It regulates the whole cash flow. The aim of running a Cost Accounting system is to understand the financial management tactics, which can improve the practices and operations of workflow in the available cost. It provides detailed insight into the current cost management and provides ideas related to future financial management. Some objectives of the Cost Accounting system are:

  • To impart knowledge of financial management among various industrial sectors
  • To provide Financial assistance to developing industries 

Methods of  Cost Accounting System 

Mainly, there are four methods of the Cost Accounting system. These are:

  • Marginal Accounting 
  • Standard Accounting
  • Activity-based costing
  • Lean Accounting

Marginal Accounting

In Marginal Accounting, the actual cost is divided into two parts. One part is a variable cost and the second part is a fixed cost. Variable costs get changed as the number of production processes increases as many units get, and the variable cost increases. But, the fixed cost remains unchanged. There is no relation between the production cost and fixed cost. They both remain separately. The variable cost changes with the rate of production. 

Standard Accounting

It is also called a traditional  Cost Accounting system method, which first appeared in the 1920s. Standard accounting is ratio-based accounting, in which the labour and material get compared and used in the process of production. It helps analyse the production output effectively. 

Activity-based Costing

In this  Cost Accounting system method, the cost of the activity is subdivided among goods and services, which are used in that particular activity, according to the consumption rate. Same with the product, it distributes the cost of the product between the labour, goods, and other expenses made during its manufacturing. So, with various indirect costs, this quantitative approach is considered directly. 

Lean Accounting

In lean accounting, the managers consider the whole manufacturing process and principles for acquiring the numerical value of cost. Lean accounting helps the organisation understand the company’s relevant financial and non-financial information. 

Elements of  Cost Accounting system

There are only three major elements of the Cost Accounting system. These are:


It is also called an inventory. These are the different goods used in the production of the final product. Mainly, the material is of two types. One is direct material, and the other is indirect material. The direct materials are those which are identifiable in the production process of the final product. They present in high quantities in the final product. And indirect materials are not identifiable and present very little in the final product. 


Labour is the group of workers who operates the entire manufacturing process. They facilitate all the operations like maintenance, transportation, and many more. Wages will be paid to them by the owner of the organisation. 


Expenses are also known as Overheads. Expenses are the amount of money spent on the different operations of the organisation. It includes many expenses like production expenses, Administrative expenses, staff expenses, maintenance expenses, transportation expenses, and so forth. 

Classification of Cost 

Here are some important domains listed in which cost can be classified. These are:

Based on nature

  • Direct cost 
  • Indirect cost 

Based on function

  • Production cost
  • Administration cost 
  • Selling cost 
  • Research and development cost 

Based on behaviour

  • Fixed cost 
  • Variable cost 
  • Semi-variable

Based on controllability

  • Controllable cost (which can be controlled) 
  • Uncontrollable cost (which cannot be controlled) 

Based on decision-making

  • Marginal cost 
  • Differential cost
  • Relevant cost  
  • Replacement cost


The Cost Accounting System helps understand the cost of different areas, like production, transportation, and so forth. It is an organised managerial process that facilitates work management and financial management. Various developed companies use the  Cost Accounting system method for regulating their finances. Although, many new startups are also adopting this financial method. However, if all the principles and fundamentals of the Cost Accounting system are followed, their production process, decision-making, and expenses will be maintained properly. It is also helpful in future planning. Owners can track the progress of their company by adopting this method.


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