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Cost Accounting: Characteristics, Objectives and Importance

 The cost accounting is the process of recording, classifying, analyzing, summarizing and assign different alternative courses of action to control costs. It aims to calculate the cost of production or service in a scientific way, and facilitate control and cost reduction.


Cost accounting provides the detailed cost information that management needs to control operations and plan for the future. Since managers make decisions only for their company, the information does not need to be comparable with similar information from other companies.


Rather, this cost information should only be relevant to your own environment. Cost accounting information is commonly used in financial accounting information; however, its main function is to be used by the management of a company to facilitate their decision-making.


Cost accounting is primarily intended for internal operating activities, unlike financial accounting.


Characteristics

Cost accounting is a form of managerial accounting and is used for the benefit of internal managers.


Since it is used by management as an internal tool, it is not required to comply with any of the standards set forth by generally accepted accounting principles and, therefore, its use varies from one company to another or from one department to another.


This differs from financial accounting systems, for which there is a complete set of standards.


Cost accounting examines the cost structure of a business. It does this by gathering information on the costs incurred by a company's activities, the allocation of selected costs to products and services, and the evaluation of the efficiency of the use of cost.


The classification of costs is essentially based on the functions, activities, products, processes, internal planning, and the control and information needs of the organization.


Use in service companies

Cost accounting had its beginnings in manufacturing companies, but today it extends to service companies.


A bank will use cost accounting to determine the cost of processing a customer's check and / or a deposit. This gives management some guidance on the price of these services.


goals

Determine the cost

Cost accounting is used to calculate the unit cost of products to report the cost of inventory on the balance sheet and the cost of merchandise sold on the income statement.


This is accomplished with techniques such as allocating production overhead and by using process costs, operating costs, and costing systems in a work order.


Costs are the expenses incurred in producing the goods or rendering services. Some examples of costs are materials, labor, and other direct and indirect expenses.


Costs are collected, classified and analyzed in order to know the total cost and per unit of products, services, processes, etc.


Analyze costs and losses

Cost analysis is necessary to classify it as controllable or uncontrollable, relevant or irrelevant, profitable or unprofitable, among other categories.


Under cost accounting, the effects on the cost of the material used, downtime and breakdowns or damage to machines are analyzed.


Control the cost

Cost control is used to minimize the cost of products and services without compromising quality.


Cost accounting controls cost through the use of various techniques, such as standard cost and budget control.


Help to fix the sale price

The costs are accumulated, classified and analyzed to determine the cost per unit. The selling price per unit is calculated by adding a certain profit to the cost per unit.


In cost accounting, different techniques are used, such as the batch cost calculation, the calculation of the cost of production services, among others, to determine the sale price.


Facilitate management

It assists in planning management by providing necessary cost information, which enables evaluation of activities as well as future planning. It helps the management to make decisions, to plan and to control a company.


With effective measurements, managers can make key strategic decisions about pricing, product offering, technologies, and controls for short- and long-term planning.


Importance

Information for management

Cost accounting is beneficial to management as a tool for budgeting and establishing cost control programs, which can improve the profitability of the company in the future.


Cost data helps management formulate business policies. The introduction of budget control and standard cost are helpful in analyzing costs.


It helps to discover the reasons for the gain or loss. It also provides data for submitting price offers.


It discloses profitable and unprofitable activities that allow management to decide to eliminate or control unprofitable activities and expand or develop profitable activities.


Benefits consumers by reducing costs

The ultimate goal of costing is to lower the cost of production to maximize business profit.


The reduction in cost is generally passed on to consumers in the form of lower prices. Consumers get quality products at a lower price.


Help investors and financial institutions

Investors want to know the financial conditions and earning capacity of the business. An investor should collect information about the organization before making an investment decision, and such information can be gathered from cost accounting.


It is also advantageous for financial and investment institutions as it reveals the profitability and financial position in which they intend to invest.


Beneficial for workers

Cost accounting helps set workers' wages. It emphasizes the efficient use of labor and scientific wage payment systems.


Efficient workers are rewarded for their efficiency. This helps induce a salary incentive plan in business.


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