Cost Accounting
Cost accounting is a form of managerial accounting that aims to capture a companys total cost of production by assessing the variable costs of each step of production as well as fixed costs, such as a lease or salary. It includes activities such as planning, controlling, performance evaluation, and decision-making, in addition to analyzing costs. The basis of cost accounting is to provide relevant and accurate information to managers, which they can use to make effective decisions to reduce expenses and maximize profits.
The cost accounting process involves four main steps: setting up an organized system of cost accounting; collecting and analyzing data to determine cost factors such as materials, labor, overhead and administrative costs; assessing overhead and administrative costs; and finally, summarizing the data and making informed decisions based on cost accounting information. At the start of cost accounting, an organized system should be set up to track and measure all costs. This requires the careful selection of cost accounts and the delineation of cost categories.
Once an organized cost accounting system has been established, accurate data must be collected. This data can include information such as materials used, labor hours, overhead costs, and other administrative costs. Through careful analysis of this data, cost factors can be isolated and accurately determined. For example, the cost of materials may be isolated and measured against other costs, such as labor and overhead, to determine their effect on overall cost.
In addition to analyzing cost factors, once accurate data has been collected, an assessment of overhead and administrative costs should be made. This involves taking into account certain expenses such as rent, salaries and other associated costs that cannot be easily attributed to specific products. By comparing these costs to the overall cost of production, managers can identify opportunities to reduce overhead and administrative costs.
Once the cost accounting process has been completed, the data must be summarized and decisions made based on the information collected. Decisions should focus on which costs can be reduced, which steps of the production process can be streamlined to be more efficient, and where investments should be made in order to improve profit margins. Cost accounting provides managers with the knowledge and tools needed to manipulate costs to maximize profitability.
Cost accounting is an invaluable tool for managers. It enables them to gain a comprehensive understanding of a companys costs, so they can make decisions aimed at reducing expenses and improving profits. By leveraging accurate data, cost accounting can provide useful information that managers can use to improve the efficiency and profitability of their companies.
