Management accounting is based heavily on cost accounting, but unless you have worked in this area you are unlikely to know exactly what it is. So, what is cost accounting?
At its simplest cost accounting is a method of evaluating the overall costs, both actual and notional, which are attributable to conducting business. This could be a per unit cost on goods produced, or a per hour cost for services provided. Generally based on standard accounting practices, it is one of the tools that managers use to determine what type of and how much expense is involved in maintaining the current business model.
Unlike financial accounting, cost accounting can also be utilized to project changes to these costs in the event of specific changes being implemented, and analyze the effects of these changes on the company and the bottom-line.
Cost accounting helps to provide up-to-date data when measuring how intelligently company resources are being used. By identifying production costs and then defining the cost of production for successive business cycles, it is possible to note any underlying trends that indicate a rise in production costs without any appreciable changes or increase in production of goods and services. This approach makes it possible to identify the reason for the change, and take steps to contain the situation and limit costs incurred before profits are impacted to a greater degree.
But it is not just production which benefits from the results of cost accounting. By using another cost accounting formula product development and marketing strategies can also be informed by the use of cost accounting. In terms of product development, it is possible to ascertain if a new product can be produced at a reasonable price, considering the cost of raw materials and the labor and equipment necessary to produce a finished product and as such establish a breakeven point. At the same time, marketing protocols can make use of this type of accounting to project if the product will sell enough units to make production a viable option.
When a particular company has several options for development, cost accounting can show which option would be the most profitable by comparing the expected incomes from each option against the production costs or opportunity costs.
If a company is planning on expanding into a new market, cost accounting tools can analyze the relative historic profitability of each market in order to find the best option.
Cost accounting is helpful in making a number of business decisions. By weighing the actual costs versus the anticipated benefit, it can help a company to avoid launching a product with no real market, prevent the purchase of unnecessary goods and services, or alter the current operational model in a manner that will decrease efficiency. It can also be employed in the preparation of realistic budgets. Whether utilized to evaluate the status of a department within the company or as a tool to project the feasibility of opening new locations or closing older ones, cost accounting can provide important data that may impact the final decision and result in cost reduction.
There are many methods of cost accounting, most of which use the matching principle where a particular cost is assigned or matched to the income it will generate. Although there are other methods used to generate different kinds of information.
One of the most important differences between cost and financial accounting lays in the way that costs are classified. Whereas, financial accounting classifies based on the transaction, cost accounting can classify in many different ways which gives the possibility of analyzing the effect of the cost on each step of the process.
- How could cost accounting be used to benefit a company?
- What are the main differences between cost and financial accounting?
- What problems can you think of with using cost accounting as a basis for budgets?