what is cost accumulation and cost assignment

Cost Accumulation

Written by True Tamplin, BSc, CEPF®

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Updated on February 28, 2023

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Table of Contents

How does it work, why do we accumulate costs, why should you care about cost accumulation, reducing the amount of costs that we accumulate, benefits of cost accumulation, cost accumulation vs savings account, the pros and cons of cost accumulation, final thoughts, cost accumulation faqs, what is cost accumulation.

Cost Accumulation is the process of tracking and recording costs incurred in a business or organization, including both direct and indirect expenses.

How does Cost Accumulation help businesses?

Cost Accumulation helps businesses measure their financial performance, ensure compliance with relevant regulations, and control their costs by providing visibility into the cost structure.

What expenses are included in Cost Accumulation?

Cost Accumulation includes both direct and indirect expenses, such as overhead costs, materials, wages & salaries, subcontractor fees, taxes & insurance, and any other costs associated with running the business.

What information is tracked by Cost Accumulation?

Cost Accumulation tracks and records all expenses associated with running a business, including costs incurred at different stages of production, and any other relevant data related to the costs.

How often should Cost Accumulation be performed?

Cost Accumulation should be performed on a regular basis, ideally at least once a month, to ensure an accurate record of the business's financial performance. In addition, all documents should be reviewed regularly and updated as necessary.

About the Author

True Tamplin, BSc, CEPF®

True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.

True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide , a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University , where he received a bachelor of science in business and data analytics.

To learn more about True, visit his personal website or view his author profiles on Amazon , Nasdaq and Forbes .

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What is Cost Accumulation?

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Cost accumulation.

Cost accumulation is the process of collecting, measuring, and categorizing costs associated with the production of goods or services, projects, or any other cost objects within an organization. It involves identifying, tracking, and organizing direct and indirect costs to provide a detailed view of the costs incurred during the production or operational process.

Cost accumulation plays a crucial role in cost accounting, as it forms the basis for cost analysis, allocation, and control. By accumulating costs, organizations can:

• Determine the cost structure of products or services: Cost accumulation helps organizations understand the various cost components associated with their products or services, such as direct materials, direct labor, and overhead costs.
• Allocate indirect costs: Cost accumulation aids in the allocation of indirect costs (e.g., rent, utilities, administrative expenses) to different cost objects or cost centers, enabling organizations to determine the total cost of a product or service.
• Monitor and control costs: Accumulating costs allows organizations to track and monitor their costs over time, identify cost trends, and implement cost control measures to improve efficiency and profitability.
• Support decision-making: Cost accumulation provides valuable information for management decision-making, such as pricing, resource allocation, budgeting, and forecasting.
• Evaluate performance: Cost accumulation is essential for evaluating the performance of departments, projects, or products, as it helps organizations identify areas of efficiency and inefficiency and implement improvements.

There are various methods of cost accumulation, depending on the nature of the organization’s operations and the level of detail required for cost analysis. Some common methods include:

• Job costing: Suitable for organizations that produce customized products or provide unique services, job costing accumulates costs for each job or project separately.
• Process costing: Appropriate for organizations that produce homogeneous products in a continuous or mass production process, process costing accumulates costs for each process or department and allocates them to the units produced.
• Activity-based costing (ABC): ABC is an advanced method that accumulates costs based on the activities that drive the costs, providing a more accurate representation of the resources consumed by different cost objects.

In summary, cost accumulation is the process of collecting, measuring, and categorizing costs to support cost analysis, allocation, and control within an organization. It forms the foundation of cost accounting and plays a vital role in managing costs, making informed financial decisions, and improving profitability and efficiency.

Example of Cost Accumulation

Let’s consider an example of cost accumulation at a custom bicycle manufacturing company called “BikeMaster.”

BikeMaster produces bicycles based on individual customer specifications. They have various cost components associated with the production process, including direct materials , direct labor, and overhead costs. To accumulate costs and manage them effectively, BikeMaster follows these steps:

• Direct materials: bicycle frame, tires, handlebars, gears, brakes, etc.
• Direct labor: assembly workers, painters, quality control personnel, etc.
• Overhead costs: rent, utilities, equipment maintenance, administrative expenses, etc.
• The cost per unit for each direct material (e.g., $100 for a bicycle frame, $30 for a pair of tires)
• The hourly labor rate for each direct labor employee (e.g., $20 per hour for assembly workers)
• The total overhead costs incurred each month (e.g., $10,000 for rent and utilities)
• Choose a cost accumulation method: Since BikeMaster produces custom bicycles, it uses job costing to accumulate costs for each custom bicycle order separately.
• Direct materials cost: The company records the quantity and cost of each direct material used in the production of the custom bicycle (e.g., 1 bicycle frame at $100, 1 pair of tires at $30).
• Direct labor cost: The company tracks the labor hours spent on the custom bicycle and multiplies them by the hourly labor rate (e.g., 10 hours of assembly work at $20 per hour = $200).
• Overhead cost allocation: BikeMaster allocates overhead costs to each custom bicycle order using an appropriate allocation method, such as direct labor hours or machine hours (e.g., if overhead costs are allocated based on direct labor hours, and the total monthly direct labor hours are 1,000, the overhead cost allocation per direct labor hour is $10,000 / 1,000 hours = $10 per hour. For a custom bicycle with 10 direct labor hours, the allocated overhead cost is 10 hours × $10 per hour = $100).
• Calculate the total cost per job: BikeMaster calculates the total cost of each custom bicycle order by adding the accumulated direct materials cost , direct labor cost, and allocated overhead cost (e.g., $100 for direct materials + $200 for direct labor + $100 for overhead = $400 total cost).

By accumulating costs for each custom bicycle order, BikeMaster can track and analyze the costs associated with producing its custom bicycles, make informed decisions about resource allocation and pricing, and identify areas for cost control and efficiency improvements.

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Module 6: Process Costing

Introduction to accumulating and assigning costs, what you will learn to do: assign costs to various stages of production.

Here is an overview of what you will learn in detail in this section:

You can view the transcript for “Process Costing” here (opens in new window) .

There are two methods for using process costs: Weighted Average and FIFO (First In, First Out). Each method uses equivalent units and cost per equivalent units but calculates them just a little differently.

When you are done with this section, you will be able to:

• Prepare a production cost report for the first stage of a multi-step process using the weighted-average method
• Prepare a production cost report for a second or subsequent stage of a multi-step process using the weighted-average method
• Prepare a production cost report using the FIFO method

Learning Activities

The learning activities for this section include the following:

• Reading: First-stage production report
• Self Check: First-stage production report
• Reading: Subsequent-stage production report
• Self Check: Subsequent-stage production report
• Reading: Production report using FIFO
• Self Check: Production report using FIFO
• Introduction to Accumulating and Assigning Costs. Authored by : Joseph Cooke. Provided by : Lumen Learning. License : CC BY: Attribution
• Process Costing. Authored by : Edspira. Located at : https://youtu.be/guZc84c5HNI. . License : All Rights Reserved . License Terms : Standard YouTube License

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What Is Cost Accounting?

Understanding cost accounting.

• Cost vs. Financial Accounting
• Cost Accounting FAQs

The Bottom Line

• Corporate Finance

Cost Accounting: Definition and Types With Examples

Yarilet Perez is an experienced multimedia journalist and fact-checker with a Master of Science in Journalism. She has worked in multiple cities covering breaking news, politics, education, and more. Her expertise is in personal finance and investing, and real estate.

Cost accounting is a form of managerial accounting that aims to capture a company's total cost of production by assessing the variable costs of each step of production as well as fixed costs, such as a lease expense.

Cost accounting is not GAAP-compliant , and can only be used for internal purposes.

Key Takeaways

• Cost accounting is used internally by management in order to make fully informed business decisions.
• Unlike financial accounting, which provides information to external financial statement users, cost accounting is not required to adhere to set standards and can be flexible to meet the particular needs of management.
• As such, cost accounting cannot be used on official financial statements and is not GAAP-compliant.
• Cost accounting considers all input costs associated with production, including both variable and fixed costs.
• Types of cost accounting include standard costing, activity-based costing, lean accounting, and marginal costing.

Investopedia / Theresa Chiechi

Cost accounting is used by a company's internal management team to identify all variable and fixed costs associated with the production process. It will first measure and record these costs individually, then compare input costs to output results to aid in measuring financial performance and making future business decisions. There are many types of costs involved in cost accounting , each performing its own function for the accountant.

Types of Costs

• Fixed costs are costs that don't vary depending on the level of production. These are usually things like the mortgage or lease payment on a building or a piece of equipment that is depreciated at a fixed monthly rate. An increase or decrease in production levels would cause no change in these costs.
• Variable costs are costs tied to a company's level of production. For example, a floral shop ramping up its floral arrangement inventory for Valentine's Day will incur higher costs when it purchases an increased number of flowers from the local nursery or garden center.
• Operating costs are costs associated with the day-to-day operations of a business. These costs can be either fixed or variable depending on the unique situation.
• Direct costs are costs specifically related to producing a product. If a coffee roaster spends five hours roasting coffee, the direct costs of the finished product include the labor hours of the roaster and the cost of the coffee beans.
• Indirect costs are costs that cannot be directly linked to a product. In the coffee roaster example, the energy cost to heat the roaster would be indirect because it is inexact and difficult to trace to individual products.

Cost Accounting vs. Financial Accounting

While cost accounting is often used by management within a company to aid in decision-making, financial accounting is what outside investors or creditors typically see. Financial accounting presents a company's financial position and performance to external sources through financial statements , which include information about its revenues , expenses , assets , and liabilities . Cost accounting can be most beneficial as a tool for management in budgeting and in setting up cost-control programs, which can improve net margins for the company in the future.

One key difference between cost accounting and financial accounting is that, while in financial accounting the cost is classified depending on the type of transaction, cost accounting classifies costs according to the information needs of the management. Cost accounting, because it is used as an internal tool by management, does not have to meet any specific standard such as  generally accepted accounting principles (GAAP) and, as a result, varies in use from company to company or department to department.

Cost-accounting methods are typically not useful for figuring out tax liabilities, which means that cost accounting cannot provide a complete analysis of a company's true costs. 

Types of Cost Accounting

Standard costing.

Standard costing assigns "standard" costs, rather than actual costs, to its cost of goods sold (COGS) and inventory. The standard costs are based on the efficient use of labor and materials to produce the good or service under standard operating conditions, and they are essentially the budgeted amount. Even though standard costs are assigned to the goods, the company still has to pay actual costs. Assessing the difference between the standard (efficient) cost and the actual cost incurred is called variance analysis.

If the variance analysis determines that actual costs are higher than expected, the variance is unfavorable. If it determines the actual costs are lower than expected, the variance is favorable. Two factors can contribute to a favorable or unfavorable variance. There is the cost of the input, such as the cost of labor and materials. This is considered to be a rate variance.

Additionally, there is the efficiency or quantity of the input used. This is considered to be a volume variance. If, for example, XYZ company expected to produce 400 widgets in a period but ended up producing 500 widgets, the cost of materials would be higher due to the total quantity produced.

Activity-Based Costing

Activity-based costing (ABC) identifies overhead costs from each department and assigns them to specific cost objects, such as goods or services. The ABC system of cost accounting is based on activities, which refer to any event, unit of work, or task with a specific goal, such as setting up machines for production, designing products, distributing finished goods, or operating machines. These activities are also considered to be cost drivers , and they are the measures used as the basis for allocating overhead costs .

Traditionally, overhead costs are assigned based on one generic measure, such as machine hours. Under ABC, an activity analysis is performed where appropriate measures are identified as the cost drivers. As a result, ABC tends to be much more accurate and helpful when it comes to managers reviewing the cost and profitability of their company's specific services or products.

For example, cost accountants using ABC might pass out a survey to production-line employees who will then account for the amount of time they spend on different tasks. The costs of these specific activities are only assigned to the goods or services that used the activity. This gives management a better idea of where exactly the time and money are being spent.

To illustrate this, assume a company produces both trinkets and widgets. The trinkets are very labor-intensive and require quite a bit of hands-on effort from the production staff. The production of widgets is automated, and it mostly consists of putting the raw material in a machine and waiting many hours for the finished good. It would not make sense to use machine hours to allocate overhead to both items because the trinkets hardly used any machine hours. Under ABC, the trinkets are assigned more overhead related to labor and the widgets are assigned more overhead related to machine use.

Lean Accounting

The main goal of lean accounting is to improve financial management practices within an organization. Lean accounting is an extension of the philosophy of lean manufacturing and production, which has the stated intention of minimizing waste while optimizing productivity. For example, if an accounting department is able to cut down on wasted time, employees can focus that saved time more productively on value-added tasks.

When using lean accounting, traditional costing methods are replaced by value-based pricing  and lean-focused performance measurements. Financial decision-making is based on the impact on the company's total value stream profitability. Value streams are the profit centers of a company, which is any branch or division that directly adds to its bottom-line profitability.

Marginal Costing

Marginal costing (sometimes called cost-volume-profit analysis ) is the impact on the cost of a product by adding one additional unit into production. It is useful for short-term economic decisions. Marginal costing can help management identify the impact of varying levels of costs and volume on operating profit. This type of analysis can be used by management to gain insight into potentially profitable new products, sales prices to establish for existing products, and the impact of marketing campaigns.

The  break-even point —which is the production level where total revenue for a product equals total expense —is calculated as the total fixed costs of a company divided by its contribution margin. The contribution margin , calculated as the sales revenue minus variable costs, can also be calculated on a per-unit basis in order to determine the extent to which a specific product contributes to the overall profit of the company.

History of Cost Accounting

Scholars believe that cost accounting was first developed during the  industrial revolution  when the emerging economics of industrial supply and demand forced manufacturers to start tracking their fixed and variable expenses in order to optimize their production processes.

Cost accounting allowed railroad and steel companies to control costs and become more efficient. By the beginning of the 20th century, cost accounting had become a widely covered topic in the literature on business management.

How Does Cost Accounting Differ From Traditional Accounting Methods?

In contrast to general accounting or financial accounting, the cost-accounting method is an internally focused, firm-specific system used to implement  cost controls . Cost accounting can be much more flexible and specific, particularly when it comes to the subdivision of costs and inventory valuation. Cost-accounting methods and techniques will vary from firm to firm and can become quite complex.

Why Is Cost Accounting Used?

Cost accounting is helpful because it can identify where a company is spending its money, how much it earns, and where money is being lost. Cost accounting aims to report, analyze, and lead to the improvement of internal cost controls and efficiency. Even though companies cannot use cost-accounting figures in their financial statements or for tax purposes, they are crucial for internal controls.

Which Types of Costs Go Into Cost Accounting?

These will vary from industry to industry and firm to firm, however certain cost categories will typically be included (some of which may overlap), such as direct costs, indirect costs, variable costs, fixed costs, and operating costs.

What Are Some Advantages of Cost Accounting?

Since cost-accounting methods are developed by and tailored to a specific firm, they are highly customizable and adaptable. Managers appreciate cost accounting because it can be adapted, tinkered with, and implemented according to the changing needs of the business. Unlike the  Financial Accounting Standards Board (FASB)-driven financial accounting, cost accounting need only concern itself with insider eyes and internal purposes. Management can analyze information based on criteria that it specifically values, which guides how prices are set, resources are distributed, capital is raised, and risks are assumed.

What Are Some Drawbacks of Cost Accounting?

Cost-accounting systems ,and the techniques that are used with them, can have a high start-up cost to develop and implement. Training accounting staff and managers on esoteric and often complex systems takes time and effort, and mistakes may be made early on. Higher-skilled  accountants  and  auditors  are likely to charge more for their services when evaluating a cost-accounting system than a standardized one like GAAP.

Cost accounting is an informal set of flexible tools that a company's managers can use to estimate how well the business is running. Cost accounting looks to assess the different costs of a business and how they impact operations, costs, efficiency, and profits. Individually assessing a company's cost structure allows management to improve the way it runs its business and therefore improve the value of the firm. These are meant to be internal metrics and figures only. Since they are not GAAP-compliant, cost accounting cannot be used for a company's audited financial statements released to the public.

Fleischman, Richard K., and Thomas N. Tyson. "The Economic History Review: Cost Accounting During the Industrial Revolution: The Present State of Historical Knowledge." Economic History Review , vol. 46, no. 3, 1993, pp. 503-517.

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• Cost Classifications
• Relevant Cost of Material
• Manufacturing Overhead Costs
• Conversion Costs
• Quality Costs
• Revenue Expenditure
• Product Cost vs Period Cost
• Direct Costs and Indirect Costs
• Prime Costs and Conversion Costs
• Relevant vs Irrelevant Costs
• Avoidable and Unavoidable Costs
• Cost Allocation
• Joint Products
• Accounting for Joint Costs
• Service Department Cost Allocation
• Repeated Distribution Method
• Simultaneous Equation Method
• Specific Order of Closing Method
• Direct Allocation Method

Cost allocation is the process by which the indirect costs are distributed among different cost objects such as a project, a department, a branch, a customer, etc. It involves identifying the cost object, identifying and accumulating the costs that are incurred and assigning them to the cost object on some reasonable basis.

Cost allocation is important for both pricing and planning and control decisions. If costs are not accurately calculated, a business might never know which products are making money and which ones are losing money. If cost are mis-allocated, a business may be charging wrong price to its customers and/or it might be wasting resources on products that are wrongly categorized as profitable.

Cost allocation is a sub-process of cost assignment , which is the overall process of finding total cost of a cost object. Cost assignment involves both cost tracing and cost allocation. Cost tracing encompasses finding direct costs of a cost object while the cost allocation is concerned with indirect cost charge.

Steps in cost allocation process

Typical cost allocation mechanism involves:

• Identifying the object to which the costs have to be assigned,
• Accumulating the costs in different pools,
• Identifying the most appropriate basis/method for allocating the cost.

Cost object

A cost object is an item for which a business need to separately estimate cost.

Examples of cost object include a branch, a product line, a service line, a customer, a department, a brand, a project, etc.

A cost pool is the account head in which costs are accumulated for further assignment to cost objects.

Examples of cost pools include factory rent, insurance, machine maintenance cost, factory fuel, etc. Selection of cost pool depends on the cost allocation base used. For example if a company uses just one allocation base say direct labor hours, it might use a broad cost pool such as fixed manufacturing overheads. However, if it uses more specific cost allocation bases, for example labor hours, machine hours, etc. it might define narrower cost pools.

Cost driver

A cost driver is any variable that ‘drives’ some cost. If increase or decrease in a variable causes an increase or decrease is a cost that variable is a cost driver for that cost.

Examples of cost driver include:

• Number of payments processed can be a good cost driver for salaries of Accounts Payable section of accounting department,
• Number of purchase orders can be a good cost driver for cost of purchasing department,
• Number of invoices sent can be a good cost driver for cost of billing department,
• Number of units shipped can be a good cost driver for cost of distribution department, etc.

While direct costs are easily traced to cost objects, indirect costs are allocated using some systematic approach.

Cost allocation base

Cost allocation base is the variable that is used for allocating/assigning costs in different cost pools to different cost objects. A good cost allocation base is something which is an appropriate cost driver for a particular cost pool.

T2F is a university café owned an operated by a student. While it has plans for expansion it currently offers two products: (a) tea & coffee and (b) shakes. It employs 2 people: Mr. A, who looks after tea & coffee and Mr. B who prepares and serves shakes & desserts.

Its costs for the first quarter are as follows:

Total tea and coffee sales and shakes sales were $50,000 & $60,000 respectively. Number of customers who ordered tea or coffee were 10,000 while those ordering shakes were 8,000.

The owner is interested in finding out which product performed better.

Salaries of Mr. A & B and direct materials consumed are direct costs which do not need any allocation. They are traced directly to the products. The rest of the costs are indirect costs and need some basis for allocation.

Cost objects in this situation are the products: hot beverages (i.e. tea & coffee) & shakes. Cost pools include rent, electricity, music, internet and wi-fi subscription and magazines.

Appropriate cost drivers for the indirect costs are as follows:

Since number of customers is a good cost driver for almost all the costs, the costs can be accumulated together to form one cost pool called manufacturing overheads. This would simply the cost allocation.

Total manufacturing overheads for the first quarter are $19,700. Total number of customers who ordered either product are 18,000. This gives us a cost allocation base of $1.1 per customer ($19,700/18,000).

A detailed cost assignment is as follows:

Manufacturing overheads allocated to Tea & Cofee = $1.1×10,000

Manufacturing overheads allocated to Shakes = $1.1×8,000

by Irfanullah Jan, ACCA and last modified on Jul 22, 2020

Related Topics

• Cost Behavior

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You can customize the licensing cost associated with your host using the custom license assignment option. Based on your requirement you can add or delete different operating system licenses to your host. With the custom license assignment option, you can increase or decrease the licensing cost associated with your host.

• From the left menu, click Configure and then click Cost Drivers .
• In the Cost Drivers tab, click License .
• Edit for All Data centers - mode helps you to customize a single cost driver value for all the data centers. Any customizations done for the Specific data center mode are lost.
• Edit for specific Data Center - mode helps you to customize different cost driver values for different data centers. Any customizations done for All data centers mode are lost. Note: When you select Edit for specific data center as the edit mode, then the select data center option is activated. Select the data center from the drop-down menu
• To customize the license cost for a specific server, click Customize License Assignment .
• Select the host for which you want to customize the license cost and click Assign .

The new operating system is listed under the Current Assignment column.

• To remove an existing operating system from the host, under Current Assignment click X icon next to the operating system. The license cost of the removed operating system is reduced from the total cost.
• Click Save .
• Navigate to the Cost Calculation Status tab and click Run .

• Using Project Costing

HCM Assignment Status Validations When Importing Person-Related Costs

By default, Project Costing doesn't allow you to import a person-related project cost transaction if the person's HCM assignment status on the date of the project cost is  Inactive or Suspended .

If you want to import project costs associated with persons whose work relationships have recently been terminated, use the Allow Cost Transactions Until Certain Days After Person Termination (ORA_PJC_ALLOW_COSTS_UNTIL_DAYS_AFTER_PERS_TERM) administrator profile option to specify the number of days after the termination date during which Project Costing will accept project cost transactions associated with terminated persons.

However, if you want to skip HCM assignment status validations altogether when you import person-related project cost transactions from specific transaction source documents, select the Allow transactions for inactive or suspended person assignments  option associated with that document.

For example, a person's HR assignment can be suspended, but the person can still be eligible for payroll processing. If you're using Labor Distribution to distribute payroll costs to projects, then the payroll costs incurred for the person's suspended HR assignment will be rejected during processing, as the assignment is not active as of the project cost dates. But if you want to allow these transactions, enable the Allow transactions for inactive or suspended person assignments in the Labor Distribution project transaction source document.

• Time and Labor doesn't transfer hours to Project Costing if they are reported on days after a person's termination date even if you allow transactions for inactive or suspended person assignments for the Oracle Fusion Time and Labor Time Card document.
• The  Allow transactions for inactive or suspended person assignments  document option takes precedence over the Allow Cost Transactions Until Certain Days After Person Termination (ORA_PJC_ALLOW_COSTS_UNTIL_DAYS_AFTER_PERS_TERM) administrator profile option, if you have enabled both.
• When you enable the Allow transactions for inactive or suspended person assignments  document option, the status of a person's assignment is not validated. However Project Costing still requires an HR assignment as of the transaction date for a person-related project cost.