Cost Accounting: Learn How Businesses Measure and Control Costs
A free, step-by-step learning path with definitions, formulas, worked examples and practice questions.
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Cost, management and financial accounting: what is the difference?
| Financial accounting | Cost accounting | Management accounting | |
|---|---|---|---|
| Main users | Outside parties: investors, lenders, tax authorities | Managers | Managers |
| Main purpose | Report past results | Measure and control the cost of products | Plan and make decisions |
| Rules | Must follow standards (IFRS, GAAP) | Set by the business | Set by the business |
| Time focus | Past | Past and future | Mostly future |
In practice cost and management accounting overlap a great deal and are often taught together. See the Management Accounting hub for planning and decision-making topics.
Your cost accounting learning path
Work through the five steps in order. Each links to a plain-English explanation with a worked example. Try the practice question before you open the answer.
Step 1: Classify costs
You will be able to: sort any cost by how it is traced (direct or indirect) and how it behaves (fixed or variable).
Quick practice: Is a factory supervisor’s monthly salary direct or indirect, and fixed or variable?
Indirect (overhead), because the supervisor serves all products. It is fixed, because it does not change with output.
Step 2: Measure what you sell
You will be able to: calculate the cost of goods sold and understand how inventory fits in.
Quick practice: Opening inventory 1,000, purchases 6,000, closing inventory 1,500. What is COGS?
1,000 + 6,000 − 1,500 = 5,500.
Step 3: Cost products with overheads
You will be able to: absorb overhead into products and compare absorption and marginal costing.
Quick practice: Overhead of 90,000 and 30,000 labour hours. What is the rate, and how much does a 40-hour job absorb?
Rate = 90,000 ÷ 30,000 = 3 per hour. A 40-hour job absorbs 40 × 3 = 120.
Step 4: Cost-volume-profit analysis
You will be able to: find contribution, break-even and the margin of safety.
Quick practice: Price 40, variable cost 25, fixed costs 30,000. How many units to break even?
Contribution = 40 − 25 = 15. Break-even = 30,000 ÷ 15 = 2,000 units.
Step 5: Control costs with standards
You will be able to: set standard costs and explain favourable and adverse variances.
Quick practice: Standard cost 8.00 per unit, actual 8.60, 500 units made. What is the variance?
(8.60 − 8.00) × 500 = 300 adverse, because actual cost is higher than standard.
Work through 8 cost accounting problems with step-by-step solutions, from classifying costs to variances.
Open the problems and solutionsCost accounting formulas at a glance
| Measure | Formula |
|---|---|
| Prime cost | Direct materials + Direct labour + Direct expenses |
| Cost of goods sold | Opening inventory + Purchases − Closing inventory |
| Overhead absorption rate | Budgeted overhead ÷ Budgeted activity |
| Contribution per unit | Selling price − Variable cost per unit |
| Break-even units | Fixed costs ÷ Contribution per unit |
| Margin of safety % | (Sales − Break-even sales) ÷ Sales × 100 |
| Cost variance | Actual cost − Standard cost (adverse if positive) |
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Frequently asked questions
What is cost accounting?
Cost accounting records, classifies and analyses the costs of producing goods or services so managers can control costs, price products and make decisions.
What is the difference between cost accounting and management accounting?
Cost accounting focuses on measuring and controlling the cost of products and activities. Management accounting uses cost and other information to support planning and decisions. The two overlap and are often combined.
What are the main ways to classify costs?
By traceability (direct or indirect), by behaviour (fixed, variable or semi-variable), and by function (production, selling, administration).
This page is for general learning. Accounting rules and terminology vary by country and syllabus.