The five parts of a cost accounting system

¶ … accounting allows managers to better understand a product's costs throughout its entire product life cycle. There can be a financial accounting element of cost accounting, but it is more often used in management accounting. Firms use cost accounting to help make decisions with respect to production location, the types of products that are produced, and the quantities of those products that are produced. Firms also use cost accounting to help them decide if a new product should be brought to market, to make decisions about product design or to determine the amount of marketing that a product should be supported with (Cooper & Kaplan, 1988). Cost accounting information can be useful both for the internal managers but also for external stakeholders such as shareholders as well. Cost accounting includes both direct and indirect products costs, including both upstream and downstream costs (Kinney & Raiborn, 2009).

Cost accounting systems have parts, each of which helping to provide the information that management needs to determine a product's costs. These five parts are input measurement bases, inventory valuation methods, cost accumulation methods, cost flow assumptions and recording interval capability (Martin, no date). Input measurement bases are the foundation of a cost accounting system. There are three ways to measure the cost of inputs -- pure historical costing, normal historical costing and base cost systems. Each of these systems relies on different treatments of costs (direct material, direct labor, etc.) so the decisions with respect to the best input measurement bases will impact how the final product costs are determined. It is important, as with other elements of the cost accounting system, that the method used is consistent over time so that the resulting product cost information is comparable.

The inventory valuation method helps the firm to treat inventory costs consistently and includes an option of the direct method, full absorption costing and activity-based costing. Cost accumulation "refers to the manner in which costs are collected and identified with specific customers, jobs, batches, orders, departments and processes" (Martin, n.d.). The methods by which this information is gathered will differ based on the type of production that is being undertaken. Cost flow assumptions relates to how costs flow through inventory accounts. This can include FIFO, LIFO, weighted average and other methods. This impacts the costs because it helps to determine which costs are counted for which period. Recording interval capability refers to the points in time when a company takes inventory. Many firms use perpetual inventory, but some firms will take inventory periodically in order to provide this information.