The Importance of Cost Accounting

The Importance of Cost Accounting

Apart from hiring an accounting firm in Johor Bahru to help you with financial accounting, do you know that your business might need cost accounting too? Cost accounting is particularly important for manufacturing businesses. It is a type of management accounting, and it aims to determine the cost of production that a company has incurred. As cost accounting allocates and records the costs incurred by the company when producing the final product, the management can use it for various purposes.

Firstly, cost accounting (Also see An Overview of Accounting Entries) plays a significant role in helping the management to identify the cost per unit for different products. Some companies that produce various products may purchase the raw material required for all the products they manufacture collectively. Then, by using cost accounting (Also see Differences Between Financial Accounting and Cost Accounting) , they will be able to analyse the cost required to manufacture every type of product, hence identify the cost per unit for all kinds of products they manufacture.

After knowing the cost per unit of the products manufactured, the management will be able to decide the selling price per unit when they sell them to the consumers. When deciding on the selling price, they should consider other factors like the supplies and demand in the market, as well as keep an eye on the availability of similar products.

Besides, cost accounting (Also see Why Do the Accountants Close the Books?) can help the management to determine the cost the company has incurred on labour, overheads, materials and so on. Hence, they will be able to prepare budget plans for the production of all kinds of products. Cost accounting plays a great role in this because the management needs to analyse the historical costs and predict future requirements based on the cost records that they have made before by using cost accounting.

In some occasions, the cost that the company has incurred may divert from what the management has planned in the budget plan. This can be caused by an incident which is out of expectation. For example, a company is running a manufacturing business (Also see Tips to Become Intelligent Business Owners) on the outskirts of town. As its supplier has encountered some problems in transporting the goods to that remote place, it is unable to obtain the raw materials that it needs in the manufacturing process. If such a condition continues for a week, the cost incurred on labour and overheads for this period will cause additional costs. This is something that the management cannot expect during the preparation of budget plans.

If such a situation occurs, the management will need the well-maintained cost records so that it can decide on the areas that they can or should cut down the cost. Thus, this shows that cost accounting will be helpful to the management in decision making.

With cost accounting, the manufacturing business can maintain its cost accounts properly. By analysing these accounts, the management and those who are involved in decision making can determine the advantages and disadvantages of the policies they want to implement on the daily operations of the company. Also, they can formulate the policies that will probably be the most suitable and practical ones based on the information they obtain from the cost accounts.

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