Management accounting is based heavily on cost accounting, but
unless you have worked in this area
you are unlikely to know
exactly what it is. So, what is cost accounting?
At its simplest cost accounting is a method of evaluating the
overall costs, both actual and notional,
attributable to conducting business. This could be a per unit cost
on goods produced, or a per
hour cost for services provided.
Generally based on standard accounting practices, it is one of the
that managers use to determine what type of and how much
expense is involved in maintaining the
Unlike financial accounting, cost accounting can also be
utilized to project changes to these costs in the
specific changes being implemented, and analyze the effects of
these changes on the company
and the bottom-line.
Cost accounting helps to provide up-to-date data when measuring
how intelligently company resources
are being used. By
identifying production costs and then defining the cost of
production for successive
business cycles, it is possible to
note any underlying trends that indicate a rise in production
without any appreciable changes or increase in production
of goods and services. This approach makes
it possible to
identify the reason for the change, and take steps to contain the
situation and limit costs incurred before profits are impacted to
a greater degree.
But it is not just production which benefits from the results of
cost accounting. By using another cost
accounting formula product
development and marketing strategies can also be informed by the
of cost accounting. In terms of product development, it is
possible to ascertain if a new product can
be produced at a
reasonable price, considering the cost of raw materials and the
labor and equipment
necessary to produce a finished product and
as such establish a breakeven point. At the same time,
marketing protocols can make use of this type of accounting to
project if the product will sell enough
units to make production
a viable option.
When a particular company has several options for development,
cost accounting can show which option would be the most profitable
by comparing the expected incomes from each option against the
production costs or opportunity costs.
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