Category: Accounting, ERP Software
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The Basics of Cost Accounting
No matter how you look at it, it’s a simple fact of life: Cost accounting is no easy thing. This is especially axiomatic when employed in the manufacturing industries. In essence, cost accounting is taking a bunch of disparate data over a prescribed period of time, and making sense of it in order to keep the ship floating with very little bailing.
Now, in more advanced lingo, let’s just say that cost accounting is the process of accumulating, measuring, analyzing, interpreting, and reporting production and other operational cost information that is both useful and relevant to the internal and external stakeholders of a business. Internal stakeholders are the business or company directors, managers, and division heads, while external stakeholders are those who have a vested financial interest in a business or company.
What are the benefits of undertaking the effort? The chief benefit of cost accounting is that it turns data into information and wisdom about a business that helps:
- Measure performance
- Reduce and/or manage costs
- Figure prices for goods and services
- Decide to authorize, modify or discontinue a process or activity
In short, cost accounting helps a manufacturing business control on-going costs, as well as the ability to make decisions going forward. For example, information on costs can be used as a basis to estimate future costs in preparing and reviewing budget requests. Once budgets are approved and executed, cost information serves as a useful feedback on performance.
In addition, costs may be compared to known or assumed benefits to identify value-added and non-value added activities. Reliable information on the costs of processes and activities is crucial for the effective management of a business entity’s operations. Cost accounting is especially important for fulfilling the objective of assessing operational performance. The objective is to improve the efficiency and effectiveness of operations by furnishing program managers and others with timely and relevant cost-based performance information to allow for continuous improvement in delivering outputs and outcomes to stakeholders.
For any manufacturer of any size, success in this post-modern economy is often a notion of cost reductions rather than production increases. That is to say, profitability is increasingly less a factor of how many things you make, and more the outcome of what savings you continuously gain by reducing your costs. This means that the use of cost accounting concepts and practices is vital to understanding where fixed and non-fixed costs can be adjusted. It provides key data to managers for planning and controlling, as well as costing products, services, and customers. The central focus is how it could help managers make better decisions through the use of the data.