The Importance and Uses of Cost Accounting
The managers use cost accounting to determine the expenses incurred in operations department and product development and in the business processes. They can come to an idea how their funds are efficiently used and which areas it has been used.
Cost Accounting- Best Management Decision Tool
By using the cost accounting system, management can reduce unnecessary expenses and increase the company profit by focusing on quality. It is the tool mostly used within the organization. It is not like financial accounting that is meant for external purpose.
Cost accounting helps the managers to view the profits and loss of the company in depth. For example, is a company has achieved twice the profit than the last year, and then the managers could check and compare the costs and expenses involved in the last and present year.
They would know the items, and quantity produced and can come to a conclusion that due to high productivity they have made double the profits. If the situation is opposite, then the manager would scrutinize each and every entry to correct the variations. The important concept in cost accounting is variation analysis. It involves breaking down components into different ones of the actual and standard one. The components under variation analysis are labor expenses variation, material expenses variation and volume variation.
Identification of Profit and Costs
Cost accounting is the essential system for the manager to save the company and increase the profits in the future. It provides necessary data about the company’s budget, and the managers can easily handle the fluctuation involved in the production expenses. Many companies use the cost accounting system internally. It is very popular among the manufacturing firms. The cost accounting does not have any specific regulations or mandatory process. Each business can implement and follow according to their business convenience. It depends on own ideas. But still, there are some best proven ideas and practices that help the industries to use them in a standard form.
It is tricky or hard to identify the profit and expenses involved in a large manufacturing company. A company may stock and produce different types of products, which various labor, overhead and materials will be used. By using computer programs, you can easily identify the cost involved to manufacture a single product in a unit. The latest ERP set up helps to find the information, where it properly classifies and stores in its memory.
Once you can find the manufacturing cost of a single piece, you need to fix a profit. The selling price would depend upon your fixed profit. If you manufacture an item for $15, then to generate profit you need to set it selling price more than $15. After identifying the costs, you need to evaluate to use the by-product more effectively and efficiently. For instance, if you are buying some raw material to produce a product and you have some leftover. You can decide to use them on another product. Thus, cost accounting helps to identify problems and errors in the manufacturing unit.