By Sheila Shanker
Cost accounting is used internally by many companies, especially manufacturing firms. The concepts regarding cost accounting are not mandated or regulated, and it’s up to each business to follow their own cost ideas. However, there are industry standards to guide firms in best practices and proven ideas to costing items, so that some form of standardization exists in cost accounting.
The main objectives of cost accounting are:
Identification of costs and profitability — The identification of costs can be tricky, since a company may manufacture different types of items, using a variety of materials, labor and overhead. Computerized programs have helped a lot in this area because of their ability to accumulate large amounts of data and report on it. These systems may interface with time sheet programs, and regular financial accounting software, creating an effective “Enterprise Resource Planning” (ERP) setup, where information is identified and properly classified.
Once all costs are identified, the next step is to price the items properly for profitability. If an item cost $15 to manufacture, then the price should be more than $15 in order to generate profits.
Cost Control — When costs can be identified, they can be evaluated. Resources can be used more efficiently and effectively. For example, if a certain material was bought a few months ago and used on one manufacture run only, it’s possible that the leftovers can be used on another product.
Cost controls also involve identifying errors and problems in the manufacturing process, which could point to the need to get a new machine or to train employees better. Maybe a certain machine is using up too much power, and the usage of solar power may be an option to lower the overall costs of production.
Tool for management decisions — Managers use cost accounting reports to help them in making sound decisions for their employers. Computerized systems allow for managers to have detailed reports by simply pressing a button, facilitating good, prompt decisions. If a product becomes too expensive to manufacture for what it can be sold, the production process can be halted, minimizing losses for the company.
Cost accounting reports may include “what if” functions, which may provide managers with alternatives. For example, management may be considering producing a new widget. Based on the data on the system, what could be the costs of such a widget? Will it be worthwhile to build it? Cost accounting can be very flexible to help management in leading the company.
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