Origin of cost accounting

Cost accounting is a part of management accounting which records and controls all expenditures of an organization in order to facilitate control of separate activities. Cost accounting is a branch that establishes budget and actual cost of operations, processes, departments or product and the analysis of variances, profitability or social use of funds. Cost accounting is essential as it help managers understand the costs of running a business.

In the early industrial age, the costs were incurred by a business were what modern accountants call "variable costs" because they varied directly with the amount of production. The expenditure was incurred on labor, raw materials, power to run a factory, etc. in direct proportion to production. Managers total the variable costs for a product and use this as a rough guide for decision-making processes. The modern cost accounting originated during the industrial revolution, the complexities of running a large scale business led to the development of systems for recording and tracking costs to help business owners and managers make decisions.

The costs include some which remain the same even during busy periods, unlike variable costs, which rise and fall with volume of work. The importance of these "fixed costs" has become more important in the modern world to the managers. Examples of fixed costs are depreciation of plant and equipment, and the cost of departments such as maintenance, tooling, production control, purchasing, quality control, storage and handling, plant supervision and engineering. In the earlier period of twentieth century, these costs were of little importance to most businesses. Though in the twenty-first century, these costs are often more important than the variable cost of a product, and allocating them to a broad range of products can lead to bad decision making. In order to make decisions about products and pricing managers must understand fixed costs.

Questions

• What was the origin of cost accounting?
• Why were variable costs incurred in the industrial age?