Definition of Cost Accounting

This time, we will discuss Cost Accounting starting from the meaning, purpose, function or benefits as well as examples of cost accounting itself,

besides that we will also discuss the stages of the accounting cycle and the terms contained in the accounting cycle.

To understand cost accounting properly, we must first understand the main object of cost accounting itself, namely Costs , The definition of cost itself is:

Costs are sacrifices or expenditures of economic resources that can be measured in units of money, both those that have occurred and those that have not occurred, which are used to achieve certain objectives.

Table of contents :

  • Definition of Cost Accounting
  • The Role of Cost Accounting
  • Cost Accounting Function
  • Purpose of Cost Accounting
    • Raw material
    • Cost of Raw Materials
    • Added Ingredients
    • Human Resources Costs
    • Factory Overhead Costs
  • Cost Accounting for Service Companies
  • Cost Accounting in Manufacturing Companies
  • Cost Accounting at a Trading Company
    • Cost of Goods Sold (COGS) account
    • Purchase Account
    • Inventory Account
    • Sales Account
    • Marketing Expense Account
    • Purchase Discounts Account
    • Cash Discount Account
  • Cost Accounting at Mining Companies
  • Cost Accounting for Property Companies
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Definition of Cost Accounting

cost accounting

The definition of cost accounting cannot be separated from the understanding of costs. Cost in this case means all expenses incurred to achieve a goal or target.

Specifically, cost also means part of the determination of the cost of goods manufactured, whether in the form of products or services, which is spent in order to generate income. By definition

Cost accounting is an activity of recording, classifying, making summaries, and presenting all transactions or costs that occur from the production and distribution (sale) process of products or services. The bookkeeping method used in accounting is known to have a certain way.

The Role of Cost Accounting

Is a tool that is needed by management for planning and control activities, improving quality, increasing efficiency and making decisions and controlling,

improve quality, increase efficiency and make decisions that are routine or strategic in nature.

  • Budgeting and implementing the company’s operating budget;
  • Determining methods and procedures for calculating costs, controlling costs, charging accurate costs, and continuous quality improvement;
  • Determination of inventory value used for cost calculation and pricing, product evaluation, department or division performance evaluation, physical inventory checking;
  • Calculate company costs and profits for one accounting period, annual or shorter period;
  • Choosing the best systems and procedures and alternatives, in order to increase revenues and reduce costs.

Cost Accounting Function

Cost accounting is defined with specific functions to support company management activities. The following are functions of cost accounting:

  • To become the basis for calculating and reporting the cost of goods or services produced.
  • To make details of the cost of goods manufactured in detail.
  • To become the basis of the information needed in preparing the financing and expense plans incurred by the company.
  • To present data and information that will underlie the company’s budgeting activities.
  • To present information on all financing made by the company that will be used by management or policy makers in controlling the management of the company.

Purpose of Cost Accounting

The purpose of cost accounting is as a source of data or information about expenses within the company. This transaction information will be used by management for decision-making activities as well as for all activities related to company management.

Not only that, you also need cost accounting to be the basis of accountability to the ranks of investors, creditors, to policy makers and shareholders of the company.

In other words, reports from cost accounting will be used in reporting to external and internal parties of the company.


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After understanding the meaning, function, and purpose of holding cost accounting, then you also need to know the cycle of this cost accounting.

The cost accounting cycle is a flow of the recording process until a financial report is produced that is easily understood by the company’s managerial ranks.

This accounting cycle is known to have several stages, namely:

  • Determination of the price of basic materials of production. This price includes the nominal value of the main raw materials to be purchased as well as the cost of purchasing materials needed in the production process.
  • Calculation of costs incurred to pay for human resources employed.
  • Calculation of factory overhead costs during production.

These three stages will continue to the next step, namely determining the selling price.

The terms contained in the cost accounting cycle are:

Raw material

These are the raw materials used to produce products that are ready to be distributed or sold to consumers. This product must also be able to be grouped by type.

Cost of Raw Materials

All financing issued from the purchase of raw materials or raw materials used for the production process.

Added Ingredients

Costs incurred for all additional materials that are also used in the production process.

Human Resources Costs

Costs incurred for the payment needs of labor or human resources owned by the company.

Factory Overhead Costs

This type of cost still includes all expenses incurred by the company in the production process. However, the costs referred to here do not include raw materials but the costs to support the production process.

For example, factory overhead costs can be in the form of labor insurance costs, electricity usage costs, water costs, and various other indirect costs.

All the components above must be recorded in full and in detail. Not only includes the number of transactions and writing dates, but also includes the collection of evidence from each transaction that has occurred.

Thus, the financial reports needed by the company, especially the ranks of policy holders, can be produced. and You need to know that there are several different specifications in the application of accounting in different business domains.

In the following, we provide an overview of the implementation of accounting in several types of company fields.

Cost Accounting for Service Companies

Another case with cost accounting at service companies. Unlike what is done in a trading company, cost accounting for this type of company has a different process flow.

This is because service companies do not make products in the form of goods or buy goods to be resold to consumers.

As the name implies, service companies only have products in the form of services or fulfillment of services needed by clients. In this case, the forms of services provided can vary.

If summarized, it can be said that the company’s activities revolve between the process of providing service preparation and ending with the use of services and payments by clients.

That is why the cost accounting cycle at a service company begins when preparations for service delivery are made. This cycle closes with the stage of providing the cost of services to be paid by the client or consumer.

Thus, the financial statements produced by service companies will display data on the cost of services used by clients. This data will be useful information in determining the steps to be taken by the company.

Cost Accounting in Manufacturing Companies

Manufacturing companies have a cycle of activities that begins with the process of making products by processing raw materials or raw materials.

The final stage of this cycle will be marked by the delivery of ready-to-sell products to the storage division or warehouse. Apart from the production cycle, manufacturing companies also have cost accounting objectives that are different from other companies.

In manufacturing companies, cost accounting has the objective of basing the determination of the cost of goods manufactured for each product produced.


Also Read:   Manufacturing Costs


Not only that, cost accounting in this area also aims to convey information in the form of cost of goods manufactured from each product unit that will be stored by the warehouse department.

The cost accounting cycle will record the turnover of the company’s activities starting from the product manufacturing process, raw material preparation, to finally producing finished products that are ready to sell.

Some of the account items that must be included in the cost accounting records for manufacturing companies are the nominal cost of goods or raw materials for the product,

Direct labor costs, factory overhead costs in the production process, to the cost of goods that are ready to sell. This finished product is then submitted to the warehouse division of the production division.

Cost Accounting at a Trading Company

There is a special function of accounting that is applied to a trading company, which distinguishes it from accounting in other companies’ fields. This is closely related to the function of a trading company.

Trading companies have a function to distribute products in the form of goods purchased by the company to the public. In this case, there is no processing from the company, but only distributing goods to consumers.

The distribution process can be done directly or indirectly. If directly, then the distribution is carried out by the company without intermediaries to consumers.

However, if it is done indirectly, the company will use a distributor for the process of selling goods, until it reaches the consumer.

If summarized, there are 4 important elements that form the basis of cost accounting calculations, including:

  • Cash out (expenses incurred by the company)
  • Incoming goods (goods purchased by a company for trading)
  • Cash in (money obtained from the sale of goods by the company)
  • Outgoing goods (goods sold by the company)

Apart from these four important elements of a trading company, there are also accounts that will not be found in the cost accounting of other companies. Here is the review.

Cost of Goods Sold (COGS) account

HPP is the cost of goods that will be the basis for determining the purchase price of goods to be marketed by the company. This price is only valid for a certain period of time and is strongly influenced by the level of demand and prices in the market.

Purchase Account

This account is used for recording all items purchased by the company. The goods referred to here are goods that will be marketed to consumers. Remember, other than the basic goods to be sold, the recording does not use this purchase account.

Inventory Account

This account is used for the amount of product inventory or goods that will be sold within a certain period of time.

Sales Account

This account summarizes all sales activity data. Listing includes items sold through distributors or in person. Thus, sales data that are not merchandise of the company will not be included in this account.

Marketing Expense Account

This account is used to record all expenses incurred by the company during the process of selling goods to consumers.

Purchase Discounts Account

This account is used to record if there is a discount given by the company that acts as a producer to your trading company.

This discount is usually given when your trading company pays for goods in cash or in full according to the time agreement between the two companies.

Cash Discount Account

This account is used if there is a discount on cash purchases. This discount is given directly, when consumers make payments for the goods purchased.

Based on the finite elements of the accounts at trading companies, you can certainly see that cost accounting for this type of company focuses on data collection of incoming and outgoing goods.


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Especially for goods that are commodity products traded by the company, including goods sold to consumers.

Cost Accounting at Mining Companies

Mining companies have a different type of business from other forms of business. Mining companies have four main activities, namely:

  1. Exploration (exploration)
    This activity is related to the search, discovery, and evaluation steps of “proven reserves” located in a mining area. Proven reserves are an assessment of the reserves of mining materials in an area.
  2. Development and construction
    activities Development activities are related to all activities undertaken to prepare proven reserves so that they can be produced to generate economic benefits. Meanwhile, construction or construction is an activity to build facilities and various infrastructure to support the production process.
  3. Production (production)
    This stage is related to the activity of lifting the mineral so that it becomes a product that can be marketed or used for further processing.
  4. Refinery
    This is the stage where mining materials are processed to become products that are ready to be marketed by the company.

Apart from these four activities, mining companies also have four operational phases, namely:

  • Exploration and evaluation stage
  • Development and construction stage
  • Production stage
  • Environmental management stage where the mining location is located

Based on the sequence of explanations above, the cost accounting cycle in this type of business is specifically regulated by PSAK. There is more than one PSAK that is applied in the accounting activities of this company, namely:

  • PSAK 33 Revised 2011 which covers production activities involving the stripping of soil layers as well as environmental management.
  • PSAK 64 which regulates the accounting for mining exploration and evaluation stages.
  • PSAK 19 which regulates development activities.
  • PSAK 16 which regulates the stages of construction activities.

Thus, it can be said that cost accounting in mining companies emphasizes financial records at each stage of the main component of its activity.

Cost Accounting for Property Companies

A property company is actually a form of business that includes the purchase of land to be developed into a housing complex. However, it is not just limited to housing.

The property business can also build industrial buildings to buildings that will be used for commercial purposes. Unlike accounting in other business areas, the application of the bookkeeping system in property companies emphasizes two activities.

The two activities are recording sales made and acknowledging profit (profit).

In practice, accounting for property companies is made based on PSAK 44. The matters regulated primarily focus on the recognition of company revenues,

recording cost components used for property project development, presentation, and disclosure of information related to transactions that occur within the company.

There are three methods listed in this PSAK 44, namely: lease method, full actual method, and deposit method. The three acknowledgments of income have their own criteria.

However, in its development, currently the accounting reference used for the property industry is ISAK 21. ISAK 21 discusses two important points relating to construction activities at property companies, namely:

  1. Problems related to recognition of income
    There is a question whether the recognition of income in a property construction agreement needs to refer to PSAK 34 of 2010. This is further regulated by ISAK 21, where the definition of construction contracts and income is explained in detail. Thus, there will be no financial recording errors.
  2. Timing of recognition of revenue from construction property
    Since property products are long-term products, the timing of recognition of revenue from construction property must be carefully determined. So that recording errors can be minimized.


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