Meaning and Evolution of Cost Accounting

Every business that makes a product or renders a service incurs expenditure — on materials, on the wages of the people who do the work, and on a range of other running expenses. Cost is the amount of this expenditure, actual or notional, that can be attached to a particular thing: a unit of product, a job, a process, or a service. Costing is the technique and process of ascertaining that cost, and Cost Accounting is the formal system of accounts that records, classifies, summarises and analyses costs so that management can control them and take informed decisions.

Put simply, financial accounting answers the question "What is the overall profit or loss of the business, and what is its financial position?" Cost accounting answers the far more detailed questions "What did each product cost to make? Which job or department is profitable and which is not? Where is money being wasted, and by how much?" It breaks the single, aggregate profit figure of the financial accounts down into the cost and profitability of each product, job, process or department.

Evolution of cost accounting. Cost accounting is a relatively modern branch of accounting. Its growth is closely tied to the following developments:

• The Industrial Revolution. As production shifted from small workshops to large factories using expensive machinery and employing large numbers of workers, owners could no longer judge the cost of a product by intuition — a systematic method of ascertaining cost became essential.
• The two World Wars and "cost-plus" contracts. Governments placed huge supply contracts with manufacturers on a "cost-plus-a-fixed-profit" basis, which forced firms to compute the actual cost of each contract accurately, and gave a strong push to cost-accounting practice.
• Growing competition. As markets became more competitive, businesses could no longer simply add a margin to a guessed cost and pass it on to the customer; they needed to know the real cost so they could price competitively and still earn a profit, and so they could cut costs where possible.
• The demand for control and planning. Modern management needs cost information not merely to find out what a thing cost after it was made, but to plan, budget and control costs while production is going on. Cost accounting evolved from a mere cost-finding technique into a full-fledged tool of managerial control.

Over time, cost accounting has grown from simple cost ascertainment into a discipline that also covers cost control, cost reduction and the supply of information for planning and decision-making — the foundation on which the wider field of management accounting is built.