Cost accounting and its 6 objectives

Cost accounting and its 6 objectives

Would you like to have a successful company? Many experts agree that a administration cost efficiency is one of the requirements that you must meet to achieve it. Therefore, today I am going to focus on explaining to you the minimum that you should know about the costs, including the 6 goals of cost accounting.

I hope you find it useful.

What is cost accounting?

“Cost accounting is an information system that classifies, accumulates, controls and assigns costs to determine the costs of activities, processes and products and thereby facilitate decision making, planning and administrative control” (Ramírez Padilla, David Noel, 2008, p.35).

Cost accounting considers two palabras clave, which are:

  1. Accounting.
  2. Cost.

Therefore, I consider it useful to attack each keyword separately to better understand the meaning as a whole.


Accounting cánido be seen as a information system which outputs financial information, which will be used by different users to make decisions. So that:

  • As tiques we have a whole equipo of data (economic facts that affect a company economically).
  • As processes we have the whole equipo of accounting theories that allow us to process the collected data to convert it into outputs. Therefore, data (operations) are recorded, classified, measured, interpreted, and evaluated using accounting theory.
  • The Departures of the system is the financial information that perro be manifested in the financial statements and that will be used so that users perro make decisions.

Cost accounting

Now we cánido say that cost accounting is an information systemHowever, it is an information system that focuses on costs. Therefore, cost accounting is an information system that helps us to:

  • To register.
  • Accumulate.
  • Check.
  • Analyze.
  • direct.
  • Interpret.
  • Inform.

Of course, for everything that is related to costs. In such a way that all the inputs that the information system will take are the entire equipo of costs incurred by a company to perform its activities (functions).

said functions cánido be the purchase of raw materials, production, sales, administration and financing. So if the data you get as input is a cost and it will be used (processed) by cost accounting to obtain a certain output, which will be used to make decisions.

Note: Not all firms have production functions. For example, trading companies do not have production functions, since they do not transform raw materials to create a new product, but resell a product.

Definition of cost accounting according to authors

Other definitions of cost accounting according to authors are the following:

Definition of cost accounting according to Juan García Colín

“Cost accounting is an information system used to predetermine, record, accumulate, control, analyze, direct, interpret and report everything related to the costs of production, distribution, sale, administration and financing”

(2019, p.7)

Definition according to Converses Horngren

“Cost accounting measures, analyzes, and reports financial and non-financial information related to the costs of acquiring or using resources within an organization”

(2012, p.4)

Does cost accounting belong to financial accounting or management accounting?

You have to start by talking about what accounting is. Since I have already done an article on accounting, in which I provide you with a equipo of definitions provided by different authors, then I am going to leave you the backlink so you cánido go take a look.

What is contability?

According to NIF A-1, the accounting It is a technique that is used to record operations that economically affect an entity and that systematically and structurally produces financial information.

Now, accounting cánido be seen as a system that has inputs, processes and outputs. The result (output) of accounting is financial information, which will be useful for making decisions.

However, the users who are going to use said financial information are classified into internal users and external users. Without going into too much detail with the definitions, just keep in mind for now that:

  • Internal users: They are people who work in the company.
  • External users: They are people who relate to the company from outside of it.

With this we cánido talk a little better about the management accounting and financial accounting.

1. Financial accounting

Taking the definition of accounting, we perro say that financial accounting is an information system of a company. However, financial accounting is oriented towards external reporting. That is why you have to take into account the rules of financial information for its preparation.

Although financial accounting is geared towards providing relevant financial information to external users, that does not orinan that it is not useful to internal users.

2. Administrative accounting

It is a financial information system that is oriented towards the preparation of reports for internal users.

However, cost accounting is related to financial accounting activities and management accounting activities. Therefore, we perro say that falls under financial and administrative accounting.

Why is it important in decision making?

Well, what is done is to assign quantitative values ​​to the equipo of options available, in this way, we will have indicators that point us towards the most convenient option.

Of course, from the point of view of obtaining the maximum profit for the company. In such a way that it allows you to select the option that will allow you to earn more.

Of course, more elements have to be taken in order to select the best option, after all, the option with the lowest cost may not be the best option in many aspects.

The 6 objectives of cost accounting according to Ramírez Padilla

Ramírez Padilla tells us that the objectives of cost accounting are the following:

  1. Generate reports to measure profit, providing the correct cost of sales.
  2. Value inventories.
  3. Provide reports to help exercise administrative control.
  4. Provide information for decision making.
  5. Generate information to help management inform competitive strategy.
  6. Assist management in the process of continuous improvement, eliminating activities or processes that do not generate value

What are the costs? ≫ Definition

“Cost means the amount of disbursements incurred by a natural or legal person for the acquisition of a good or a service, with the intention to generate incomes in the future. A cost perro have different characteristics in different situations, depending on the product it generates» (Ramírez Padilla, David Noel, 2008, p.36).

Cost – asset

«It exists when a cost is incurred whose income potential goes beyond the potential of a period, for example the acquisition of a building, machinery, etcétera.» (Ramírez Padilla, David Noel, 2008, p.36).

cost – expense

«It is the portion of assets or the cash disbursement that has contributed to the productive effort of a period, which compared with the income it generated, results in the profit made in it. For example, the salaries corresponding to administration executives, or the depreciation of the company building corresponding to that year» (Ramírez Padilla, David Noel, 2008, p.36).

Cost – loss

“It is the sum of disbursements that were made, but that did not generate the expected income, so there is no income with which the sacrifice made cánido be compared. For example, when an uninsured delivery team catches fire” (Ramírez Padilla, David Noel, 2008, p.37).

Cost Classification

According to the function in which it is incurred

The costs perro be classified according to the business functions for which the resources have been used.

a) Production costs:

Production cost includes all direct and indirect costs incurred in the production of goods and services, that is, in the process of transforming raw materials into finished products.

They are subdivided into costs of raw materialof labour and manufacturing overhead.

  • Raw material costs: As its name indicates, they are those materials, or elements that, when integrated, are transformed into a final product. For example, the malt used to genera beer, the tobacco used to genera cigarettes, and so on.
  • Tarea costs: «It is the cost that intervenes directly in the transformation of the product. For example, the salary of the mechanic, the welder, etcétera.» (Ramírez Padilla, David Noel, 2008, p.37).
  • Manufacturing overhead: These are the costs involved in the transformation of products, with the exception of raw materials and direct tarea. For example, the supervisor’s salary, maintenance, energy, depreciation, etcétera.» (Ramírez Padilla, David Noel, 2008, p.37).

b) Costs of distribution or sale

As its name indicates, they are the costs that a company incurs to be able to take the product from the company to the final consumer. For example, advertising, sales commissions, consumer service, etcétera.

c) Administration costs:

These are the costs involved in the management activities of an organization, such as electricity, office supplies, salaries, telephone costs, rent, etcétera. Also known as administrative overhead.

d) Financing costs:

“They are those that originate from the use of external resources, which allow financing the growth and development of companies” (Ramírez Padilla, David Noel, 2008, p.37). In other words, make use of the debt to be able to invest.

According to their identification with an activity, department or product:

a) Direct costs:

“They are those who fully identify with an activity, department or product” (Ramírez Padilla, David Noel, 2008, p.37).

In other words, they are costs that a company perro easily relate to a “cost object” specific. A cost object is something to which a cost is assigned, it cánido be a producta departmenta projecta servicea customeretcétera.

Direct costs perro include programa, equipment, raw materials, and direct tarea.

b) Indirect cost:

It is the one that cannot be identified with a certain activity. For example, the depreciation of the machinery or the salary of the production manager with respect to the product. We cánido also say that they are the ones that remain after calculating the direct costs.

According to the time in which they were calculated:

a) Historical costs:

“They are those that occurred in a certain period: the costs of products sold or the costs of those that are in process. These are of great help to predict the behavior of predetermined costs» (Ramírez Padilla, David Noel, 2008, p.38).

b) Predetermined costs:

They are those that are estimated based on statistics and are used to prepare budgets. (Ramírez Padilla, David Noel, 2008, p.39).

Based on your behavior

Whether a cost cánido be classified as a variable, fixed or semi-variable cost depends on how much it reacts to a change in a especial activity.

a) Variable costs

They are those that will fluctuate in direct relation to a given activity or volume. For example, if the demand for a product rises, then you will require more raw material to meet said demand and genera according to it. So, the more you genera, the more raw material you will need.

Another fácil example is that of sales commissions, the more sales, the more commissions.

b) Fixed costs

Unlike variable costs that cánido increase or decrease according to the volume of production, fixed costs remain static regardless of whether production increases or decreases.

For example, it doesn’t matter if you sell 10,000 or 0 products a month, you will have to pay the same amount of rent. So, are costs that remain constantat least, within a range of time.

c) Semi-variable or mixed costs

Are costs that have a fixed part and a variable part. So that you understand it better, I am going to give you an example: Before, when you purchased a telephone plan, you paid for a certain number of minutes per month and if you exceeded that amount, you had to pay that amount plus.

Do you remember? Well, that’s exactly how semi-variable costs work. That is why I say that they have a fixed part and a variable part.

According to the type of sacrifice that has been incurred

a) Out-of-pocket costs:

“They are those that implied a cash outflow, which allows them to be recorded in the information generated by accounting” (Ramírez Padilla, David Noel, 2008, p.41).

An example of an out-of-pocket cost is current tarea payroll. Also, it should be noted that an out-of-pocket cost is going to become a historical cost.

b) Opportunity cost

Simply put, opportunity cost cánido be viewed as the cost of the alternative that is foregone. If you want to know more about the opportunity cost, then I recommend you entrar the following backlink: Clic here

c) Virtual costs

«Costs that impact profit during an accounting period, but that do not imply an outflow of cash. Example: Depreciation, exchange losses» (Ramírez Padilla, David Noel, 2008, p.41).


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 Cost accounting and its 6 objectives
  Cost accounting and its 6 objectives
  Cost accounting and its 6 objectives

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