The advantages of cost accounting
/What is Cost Accounting?
Cost accounting involves the recordation, analysis, and reporting of costs to management. The intent behind this type of accounting is to provide insights into the cost structure of a business that can be used to better manage it, thereby improving profitability. It is especially useful for understanding which segments of a business are profitable, and which require improvement.
What are the Advantages of Cost Accounting?
There are multiple advantages to using cost accounting, since it provides vastly more actionable information than the financial statements produced through financial accounting. The key advantages of cost accounting are noted below.
Cost Object Analysis
Revenues and expenses can be clustered by cost object, such as by product, product line, and distribution channel, to determine which ones are profitable or require further support. This can result in several management decisions, such as providing more funding to a cost object to increase its profitability, or perhaps the reverse - to eliminate it in order to stop incurring losses.
Investigation of Causes
An effective cost accountant not only locates problems within a company, but also drills down through the data to determine the exact cause of the issue, and also recommends solutions to management. This activity is greatly appreciated by managers, who do not have to waste time digging into the underlying issues themselves.
Trend Analysis
Costs can be tracked on a trend line to discover expense spikes and declines that may be indicative of long-term trends. Changes falling outside of a predetermined range are routinely investigated, with the cost accountant flagging unusual variances for further management investigation.
Cost Modeling
Costs can be modeled at different activity levels. For example, if management is contemplating the addition of a second shift, cost accounting can be used to derive the additional costs associated with that shift.
Related AccountingTools Courses
Acquisition Effects
The cost structures of possible acquisition candidates can be examined to see if costs can be pruned in some areas, thereby justifying the cost of the acquisition. This may include an analysis of the costs that can be reduced by combining the businesses into a single operating entity.
Project Billings
If a company is billing a customer based on costs incurred, cost accounting can be used to accumulate costs by project and roll this information into customer billings.
Budget Compliance
Actual costs incurred can be compared to budgeted or standard costs, to see if any part of a business is spending more than expected. However, this item can have limited applicability when the budgeted or standard costs used as the basis of comparison were politically derived, and so do not reflect reality.
Capacity Management
The ability of a business to support increased sales levels can be examined by exploring the amount of its excess capacity. Conversely, equipment that is idle can be sold off, thereby reducing the asset base of the organization. This can also include an analysis of the throughput being generated through a firm’s bottleneck operation.
Outsourcing Effects
One can determine whether certain tasks or processes should be handled in-house or outsourced, based on an analysis of the relevant costs.
Inventory Valuation
The cost accountant is usually tasked with accumulating the cost of inventory for financial reporting purposes. This includes charging direct labor to inventory, as well as allocating factory overhead to inventory.
Related Articles
The Difference Between Cost Accounting and Financial Accounting