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Cost accounting is defined as “a technique or method for determining the cost
of a project, process, or thing. . . . This cost is determined by direct measurement,
arbitrary assignment, or systematic and rational allocation.”1 The appropriate method
of determining cost depends on the circumstances that generate the need for information.
Various costing methods are illustrated throughout the text.
Central to a cost accounting system is the process for tracing various input costs
to an organization’s outputs (products or services). This process uses the traditional
accounting form of recordkeeping—general and subsidiary ledger accounts. Accounts
containing cost and management accounting information include those dealing with
sales, procurement (materials and plant assets), production and inventory, personnel,
payroll, delivery, financing, and funds management.2 Not all cost information is
Chapter 1 Introduction to Cost and Management Accounting in a Global Business Environment 5
How do financial and
management accounting relate
to each other?


1 Institute of Management Accountants (formerly National Association of Accountants), Statements on Management Accounting
Number 2: Management Accounting Terminology (Montvale, N.J.: NAA, June 1, 1983), p. 25.
2 With reference to accounts, this text will focus primarily on the set of accounts that depicts the internal flow of costs.
This manufacturer of televisions
must use cost accounting techniques
to determine financial
statement valuations for product
inventory and cost of goods
sold.
reproduced on the financial statements, however. Correspondingly, not all financial
accounting information is useful to managers in performing their daily functions.
Cost accounting creates an overlap between financial accounting and management
accounting. Cost accounting integrates with financial accounting by providing
product costing information for financial statements and with management
accounting by providing some of the quantitative, cost-based information managers
need to perform their tasks. Exhibit 1–2 depicts the relationship of cost accounting
to the larger systems of financial and management accounting. None of the
three areas should be viewed as a separate and exclusive “type” of accounting.
The boundaries of each are not clearly and definitively drawn and, because of
changing technology and information needs, are becoming increasingly blurred.

The cost accounting overlap causes the financial and management accounting
systems to articulate or be joined together to form an informational network. Because
these two systems articulate, accountants must understand how cost accounting
provides costs for financial statements and supports management information
needs. Organizations that do not manufacture products may not require
elaborate cost accounting systems. However, even service companies need to understand
how much their services cost so that they can determine whether it is
cost-effective to be engaged in particular business activities.