26 Mar 2021

What is Cost Accounting, and how does it differ from Financial Accounting?

Cost Accounting is defined as “The recording of all the costs incurred by a business or agency for use in improving its management”. Financial Accounting has a different objective which aims to track financial transactions, but the goals are a) to account for every dollar and b) to prepare financial statements.

Cost Accounting is particularly focused on distributing the costs of an agency to various “cost centers”. These cost centers may be several types, depending on the type of agency:

  • Public Works – Project, Road Segment, Bridge
  • Facilities Management – Building, Department/Agency, Work Order
  • Fleet – Vehicle, Repair Order
  • Health & Human Services – Project, Grant, Case

Cost Accounting adds a level of distribution detail that is critical to management of a government agency, but generally not required by financial accounting standards.

One way to think of this difference is to understand the questions each discipline might ask:

Financial Accounting – “How much did your division spend on payroll last month?”

Cost Accounting – “How much was the labor cost for your division on Project XYZ last month?”

Answering these two questions can take very different paths. Payroll is an absolute amount – wages paid, and optionally fringe benefits paid on behalf of the employees. Labor cost is often a weighted rate – wages, fringe benefits, and non-productive time can be summed to form an “Applied Rate”. Once we have this applied rate, we can break down the labor cost based on the distribution – where, and on what, did Jane Doe spend that hour, and what activity was she performing?

In addition to labor costs, there are often 3 additional cost components to distribute:

  • Equipment Charges – Whether Jane is a Road Worker driving a grader on a job site, or a Health Dept Registered Nurse driving a sedan to set up a flu clinic, or a Buildings & Grounds Maintenance Tech mowing and blowing at the courthouse-all three are using equipment. The use of this equipment can be quantified (how long or far did you use it), costed (what is the hourly/mileage rate), and distributed (where did you use the equipment, and what were you doing with it). Whereas the labor cost per hour comes from employment data, equipment costs per hour may be built by tracking the cost of ownership and maintenance of the equipment.
  • Material Charges – Road materials (sign posts, rock, striping paint, etc), Facilities materials (HVAC filters, cleaning supplies, paint, construction materials), Health Dept Materials (car seats, outreach materials).
  • Overhead Charges – Overhead can be anything from small tools and lubricants at the shop, to personal protective equipment on the roads, to the utility bill for the lights back at the office. Anything that costs money but can’t be charged specifically to a project, location, or activity could be included in overhead.

Once we have these costs allocated and distributed, you can use this information to manage your department going forward.

  • Requesting reimbursement – Whether from a grant, neighbor agency or municipality, citizen, or other funding source, many costs are eligible for reimbursement.
  • Reporting to oversight agencies – Many states and regions have reporting requirements. Cost Accounting is an essential part of prepping for this reporting.
  • Budgeting – Cost Accounting can tie back into financial accounting by providing transparency into the real cost of a project.

Government cost accounting software solutions that complement traditional financial accounting are critical for reporting and budgeting within agency. Agencies also report up to the state level and well-defined cost accounting practices can ease the heavy burden at fiscal reporting periods.


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