Definition: A cost accounting system is used by manufacturers to record production activities using a perpetual inventory system. In other words, it’s an accounting system designed for manufacturers that tracks the flow of inventory continually through the various stages of production.
What Does Cost Accounting System Mean?
A typical cost accounting system works by tracking raw materials as they go through the production stages and slowly turn into finished goods in real time. When the raw materials are put into production, the system immediately records the use of the materials by crediting the raw materials account and debiting the goods in process account. Since most products go through many stages before they can be called finished goods, there are often several different work in process accounts.
As the materials move from one operation to the next, the cost accounting tracks the progress and updates it in the computerized system. This is extremely helpful for production managers and cost accountants, so they can see how much inventory is in every stage of production at any point in time.
It also allows companies to maintain just-in-time inventory systems where materials are only ordered from vendors and supplies on an as needed basis. No extra quantities are ordered and stored for processing at later point. The company only orders enough materials to fulfill the current customers’ orders. This saves the company on many different costs including storage, security, and obsolescence.
The real time component of the system is its most valuable feature. Management can make decisions based on current data and don’t have to wait for reports to be aggregated. Although important, this feature is not always easily achieved. Most companies either use a bar code system or implant each product with an RFID chip to track its location in the production process.
Manufacturers using job order cost accounting and process cost accounting can both benefit from cost accounting systems.