Which of the following best describes a cost accounting system?

• A. A system used exclusively for tracking cash flows in a business.
• B. A system that measures, records, and reports product costs for internal management use.
• C. A system designed to record only non-monetary transactions.
• D. A system that focuses solely on preparing financial statements for external users.

Answer: (B)

Verified step by step guidance

1. Understand the concept of a cost accounting system: It is a system designed to measure, record, and report product costs, primarily for internal management purposes. This helps managers make informed decisions about pricing, budgeting, and cost control.
2. Eliminate incorrect options: Review each option provided in the problem and identify which ones do not align with the definition of a cost accounting system. For example, a system used exclusively for tracking cash flows is not a cost accounting system, as it focuses on cash management rather than product costs.
3. Focus on the correct purpose: A cost accounting system is not designed to record only non-monetary transactions or solely prepare financial statements for external users. These functions are outside the scope of cost accounting, which is more internally focused.
4. Identify the correct answer: The correct description of a cost accounting system is 'A system that measures, records, and reports product costs for internal management use.' This aligns with the primary purpose of cost accounting.
5. Reinforce understanding: Recognize that cost accounting systems are essential for internal decision-making, helping businesses optimize operations, control costs, and improve profitability.