Management and Cost Accounting

What gets measured gets managed, so measure what matters.

How Costs are Categorized

There are two basic types of accounting: managerial (or cost) accounting, and financial accounting.

In financial accounting we show costs as expenses on the Income Statement. Direct costs are sometimes shown as an expense line right below revenues. We call this expense line Cost of Goods Sold or COGS.

In cost accounting our focus is on what is costs to produce something. Our goal is to manage costs and optimize them. The less something costs to make, the more profit.

We bundle expenses to parse cost information so we can gain managerial insights. Our goal is to better analyze product or manufacturing costs.

We separate our costs into two general categories: direct and indirect costs. There are three basic elements of costs: direct materials, direct labor, and overhead. Materials and labor are the major components that make up direct costs. Overhead is an indirect…