It is important to understand the objectives of cost accounting. Cost accounting is a part of management accounting that is concerned with the identification, accumulation, classification and appropriation of cost data in a business to help management with information that is useful for price determination, budgeting, financial control and decision making among other things. Cost accounting produces information purely for internal use by management. The scope of information varies from the identification of single individual item costs to complex calculations including multiple variables. This article outlines the objectives of cost accounting.
Table Of Contents
Determining input cost
One of the major objective of cost accounting is determining the input cost. When undertaking business ,goods and services have widely varying complexities and cost structures. Identifying the costs of input into a product is a very important function to business management. Some costs are very small, such as the glue used by a cobbler when mending shoes but still must be taken into account. Some cost information is easy to ignore such as transportation costs to bring goods to a location for distribution. Being able to correctly identify and apply costs is one of the primary functions of cost accounting systems. It is not limited to goods as services business must also make cost allocation decisions such as the design fee on a product brochure. Cost accounting helps in identifying various types of costs such as variable, fixed, stepped and more. Input costs identification is an objective of cost accounting.
Pricing Decision / Determining the Selling Price
The question of how much to sell products for is key to businesses and that is another important objective of cost accounting. By determining product cost information, the pricing decision can be made. A manufacturer may look at all input costs then apply.a mark up to arrive at a retail price for their products. Even in markets where prices are determined externally such as mining the input cost is still very important because if identifies if business is worth undertaking at current prices and if not which price levels would make it viable. Thus a major objective of cost accounting is that it helps in the pricing decision.
To Help in Budget Preparation
Of course business operations have to be planned for and again cost accounting provides crucial information for budgeting purposes. Helping with budget preparation is an objective of cost accounting. Depending on the source of funding owners or managers would need to approach with solid plan that shows how much is required to fund operations and also how much they expect to make feel operations. For equity finance this represents a return to them while debt financiers look at budgeted inflows as the source from which their interest and principal repayments will be made from. Budgeting is a key function that not only considers planning but also has applications for both performance management and financial control purposes. Budgeting input is an essential objective of cost accounting.
Financial control is an accounting function that deals with performance appraisal and review. It is used to track the performance of an organisation or business against the plans put forward in a budget. One of the objective of cost accounting is provision of the primary budget information that is used to measure performance. Cost accounting can also be used to derive benchmarks from within the business or outside and apply the systems of measurement and comparison such variance analysis to give a view of a businesses performance. Thus financial control is an important cost accounting objective.
Helps with Decision Making
Another cost accounting objective is to help with decision making. There are various decisions businesses make that are impacted by information produced by cost accounting. One that is easy to grasp is the outsourcing decision traditionally referred to as make or buy. An example of this is an online retailer which is contemplating how they will carry out their deliveries. Do they employ delivery drivers and invest in delivery infrastructure and assets or do they arrange with a third party that has delivery infrastructure in place? Cost is not the only factor but it does play a major part in the choice. In online retail delivery fees are an important consideration as they are paid directly by the customer and could very well make or break the purchase decision. Another example of situations were cost accounting information is used for decision making is when a business has competing products. Cost information can be used to determine resource usage and rank possibilities. It can also be used to determine an appropriate product mix in a product line. Helping with decision making is a major objective of cost accounting.
Cost Benefit Analysis
Another important objective of cost accounting is to help with cost benefit analysis. Cost benefit analysis has many applications in management. It is used in cost accounting to determine profitability, break even point, special order decisions among others. Profitability analysis is mostly applied in businesses where products are bespoke. A customer furniture manufacturer or a service such as staff training are two very good examples of. No two engagements or orders are the same for the most part. Each decision must be analysed individually to see if it is profitable for the business to carry out the order.
Break Even Analysis
Break even point is a cornerstone of management decision making and perhaps the most famous product of cost accounting. The break even point is a mathematical calculation arrived it where profit or loss for a business is zero. This point is important because it determines a minimum threshold for activity level and provides a quantity at which a businesses experiences greater profitability as the activity increases. This allows a businesses management to know when to take on additional business at reduced prices. A brilliant example of this in application is airline ticketing. Airlines will sell tickets at reduced prices early on then increase pricing as the date of the flight draws closer. If the flight has reached break even point they can discount the tickets to fill the plane, if not they continue to sell at full price. If a flight is not full as the date of flying is within a few days they can discount tickets in order to reach break even level. This is an important objective of cost accounting.
Other Objectives of Cost Accounting
- Cost accounting facilitates prompt and reliable information to management
- It helps determine the cost per unit of a product
- Can help management with determining bonuses basing on productivity and cost savings
- Cost accounting helps with exercising effective control of raw materials, work in progress and finished goods
- It helps with special cost studies and investigations which help the management in decision making
- Cost accounting helps with preparation of financial statements, especially profit and loss statement and balance sheet
- It provides data for cost comparisons between different firms
- Cost accounting helps in determining the reasons of increase or decrease in profits
- It helps with analysing the costs of operations and processes
- Cost accounting helps with determining the profitability of each and every product
- Controlling and minimising costs
- Matching cost with revenue
The above are the major objectives of cost accounting. As you can see cost accounting provides a wide variety of information that is pivotal to many important decisions in business operations. While the information is prepared for internal use it has implications that extend beyond the business affecting customers, competitors and partners.