Cost accounting is a facet of management accounting that determines the actual cost associated with manufacturing a product or providing a service by looking at all expenses within the supply chain. It is done for the purpose of budget preparation and profitability analysis. The information derived from this process is useful to managers in determining which products, departments or services are most profitable and which ones need improvement.
Cost accounting involves determining fixed and variable costs. Fixed costs are expenses that recur each month regardless of the level of production. Examples include rent, depreciation, interest on loans and lease expenses. Variable costs are expenses that fluctuate with changes in production level, such as supplies, labor, and maintenance expenses. These costs are related to production in that the more units of a product produced, the more expense there is associated with the materials and labor that went into making the product.
Cost accounting determines both fixed and variable costs associated with a product line to determine the break even point, and then ultimately the profit. The break even point represents the point at which expenses are covered by sales. Profit is determined by using the break-even point as the starting point for calculating profit. All sales beyond the break even point are profit. Determining the number of units that need to be sold to reach the break even point and then achieve profit is know as cost-volume-profit analysis.
The Role of a Cost Accountant
While most cost accountants work in government organizations or large companies, some will work as consultants either through public accounting firms or their own independent practice. Private consultants will often be called upon to perform services for small or mid-sized businesses that cannot substantiate the full-time employment of a cost accountant. Those who are employed full-time will perform a wide variety of duties:
- Providing data for stable budget developments
- Using software to allocate indirect costs to internal processes
- Detailed analysis on suitable cost drivers
- Evaluation of potential business ventures
Cost accountants should be familiar with all of the methods of cost accounting, as well as the software programs that support cost accounting functions. There are four primary methods of cost accounting, each of which allocates indirect costs to individual product lines and / or services:
- Standard Costing System assigns an average cost to each direct cost (labor, material, overhead, etc) associated with a product so as to standardize the cost accounting system. This is one of the more popular methods of cost accounting used by small and medium sized businesses because of its simplicity.
- Activity-based Costing determines fixed and variable costs in proportion to the direct cost associated with a product line.
- Throughput Accounting focuses on the expansion of an organization’s efficiency, by reducing production bottlenecks and/or limitations and thereby maximizing throughput.
- Cost-Volume-Profit (CVP) Analysis determines total fixed and variable costs based on the total quantity of products produced. It uses this information to calculate a company’s breakeven point, or the production level at which it will begin to earn a profit.
While many software packages are specific to particular industries, popular programs include SAP, Oracle, and JD Edwards. Familiarity with these packages will strengthen a cost accountant’s ability to perform and analyze data at foundation levels. Cost Accountants should stay abreast of new developments in accounting technology and trends, to ensure efficiency and effectiveness.
Obtaining the title “cost accountant does not have any educational requirements in itself. However, many companies and governmental agencies have a minimum education requirement before promoting a candidate into the position. For most professions, this is a bachelor’s degree in accounting or finance. These undergraduate programs will likely include at least one course dedicated to cost accounting, and the different methodologies employed.
Candidates wishing to heighten their marketability as a Cost Accountant should consider a post-graduate degree such as a Masters in Business Administration (MBA). Obtaining such a degree can increase a professional’s likelihood of obtaining a management position in the future.
Certifications and Associations
Certified Public Accountant
Like many other accounting career paths, obtaining licensure as a certified public accountant (CPA) will appropriately position a candidate for cost accounting jobs. To be eligible to take the Uniform CPA Exam, an applicant generally must have 150 college credit hours in relevant coursework, including accounting, finance, business management, and ethical standards. Upon passing the four-part CPA exam, many states will also require a certain amount of experience before issuing a CPA designation.
CPAs are commonly supporting by two primary organizations, one at the national level and another at the state. The national organization is the American Institute of Certified Public Accountants (AICPA). Both associations provide members with education, networking and leadership opportunities.
Certified Cost Accountant
The Institute of Certified Cost and Management Accountants offers a Certified Cost Accountant (CCA) program for accountants specializing in cost accounting. This credential is designed to substantiate an accountant’s proficiency in cost accounting methods, technology and implementation.
To obtain CCA certification, a candidate must be a member in good standing with the Institute of Certified Cost Accountants (ICCA). An ICCA membership requires a degree in higher education, usually a bachelor’s or an MBA. In addition, candidates must have a passing score (60% or higher) on the four-hour CCA examination.
Similar to a CPA certification, CCA’s must adhere to continuing education requirements to be eligible for license renewal. A CCA must acquire at least 60 hours of continuing education every three years. They must also keep their membership in the ICCA current by paying an annual fee.
Cost accounting falls squarely into the classification for general corporate accountants. According to the U.S. Bureau of Labor Statistics, accountants serving in enterprise management roles earn an average of $82,770 as of 2020, but the top ten percent that year made more than $128,680.
In other industries across the U.S., average salaries for corporate management accountants looked like this in 2020:
- Oil and Gas Extraction – $92,530
- Hedge Funds and Investment Pools – $85,880
- Insurance and Employee Benefits – $84,930
May 2020 U.S. Bureau of Labor Statistics salary and labor market information for Accountants and Auditors is based on national data, not school-specific information. Conditions in your area may vary. Data accessed April 2021.