Introduction to Cost Accounting Terminology

  1. Cost

It measures the economic sacrifice made to achieve an organizations goals. For a product, cost represents the monetary measurement of resources used such as materials, labour and overheads.

For a service, cost is the monetary sacrifice made to provide the service. Accountants generally use cost with other descriptive terms, for example, historical, product, prime, labour or material. Each of these terms defines some characteristic of the cost measurement process or an aspect of the object being measured.

  1. Cost Units

It is the quantitative unit of the product or service in relation to which costs are ascertained. The cost unit will be determined by the nature of the business enterprise. It may be

    • An individual job, batch or contract
    • A unit of production expressed as a relevant quantity
    • A service is provided to the customer
  1. Cost Accountant

Is a member of chief accounting officers department. He is responsible for collecting product costs and preparing accurate and timely reports to evaluate and control company operations. Cost accountants assemble, classify and summarize financial and economic data on the production and pricing of goods and services

  1. Cost Analysis

Is an activity that uses engineering, time and motion studies, timekeepers records and planning schedules from production supervisors. Cost analysis techniques include break even analysis, comparative cost analysis, capital expenditure analysis and budgeting techniques. After determining what is actually happening, accountants should identify available alternatives. Professional judgment is then needed to apply and interpret the results of each costing technique.

  1. Cost benefit approach

Is the primary criterion for choosing among alternative accounting approaches. In a company, there is a direct relationship between the amount of time and the funds management is willing to spend on cost analysis and the degree of reliability desired. If a company wants detailed records with a high degree of accuracy, managers should provide additional time and money for compiling and maintaining cost information. Managers should only use cost analysis and control techniques when anticipated benefits in helping achieve management goals exceed the cost.