Introduction to Cost Accounting for Business

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Having understandable financial information is essential for the proper management of a company, otherwise there could be errors or shortcomings that over time could affect the stability of your business. In addition, clear accounts allow better decision-making, increase your business efficiency and optimize your business strategy.

One of the tools that are most used internally in business is cost accounting, since it allows you to carry out a detailed analysis of the costs in your production, distribution, financing and administration.

If you want to know in depth what cost accounting is and how you can do yours, do not miss the content of this article.

Cost accounting does not only focus on the outflow of money from a company. It also takes care of everything related to the consumption of goods, asset depreciation and deductions. In addition, it gives financial follow-up to both internal costs (such as products or services and the areas of the organization) and external (customers).

For effective business management it is vital that companies know their real costs in order to make decisions more adapted to their commercial reality.

The importance of cost accounting

Production costs are a necessary expense to provide a product or service, so knowing cost accounting in detail will allow you to make beneficial decisions for your organization.

Having real information will help you to have a bigger picture when developing new projects, it will reduce risks and reduce uncertainty. Accounting is ideal to provide relevant data to managers, who will be able to more easily know the economic situation of your company and thus make better decisions.

Actions carried out internally will be carried out with a better understanding of whether they generate profit or loss, and in this way it will be easier to achieve a balance between costs and income. In addition, you will discover exactly how much you should offer your products, since you will know in detail the total expenses of the production of your good or service.

In short, cost accounting is important in your company because:

  • Quantify the money disbursements for the achievement of goals and objectives.
  • Determine the economic losses from the consumption of goods, depreciation of assets and deductions.
  • It facilitates the calculation of costs to invest in the elaboration of products.
  • It allows to adapt quickly and efficiently to crisis scenarios.
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By taking all these points into account, cost accounting allows to implement different strategies that optimize different aspects within a company, for example: production costs, staff cuts, acquisition of tools and solutions that improve employee productivity, implementation of cheaper materials, among others.

Companies are in constant movement, so they look for the opportunity to implement new ventures that consolidate their growth within their market. However, many times these actions can be put at risk due to logistics problems or lack of budget. This is where cost accounting comes into support in determining pricing strategies and even contributing to problem solving for each new initiative.

4 objectives of cost accounting

The main objective of cost accounting, as we already mentioned, is to maintain the financial balance of a company. This entails a good determination of costs, setting prices, proper recording of expenses and investments, as well as the monitoring and timely presentation of monetary data for decision-making.

But this is not the only objective to highlight. Cost accounting also has the following points as a fundamental task.

1. Collect and analyze costs in a relevant way

Knowing precise data on the costs that are generated in the process of transforming the raw material into a finished product serves in the management area for planning, control and decision-making.

2. Have detailed accounting information

Cost accounting provides detailed information to senior management, adapting to the information needs of managers.

3. Analyze the accounting

The identification, measurement, accumulation and interpretation of the information of your expenses works for both internal and external uses and allows you to plan, control and secure your accounting.

4. Take care of your organization’s assets

Information allocation is essential for planning, evaluation and control operations. It allows you to communicate assertively with internal and external clients to safeguard your company’s assets.

4 differences between general accounting and cost accounting

There is often some confusion when it comes to general and cost accounting issues. Needless to say, while they may be similar functions, they have critical differences that make them equally important to an organization. To differentiate them correctly, consider the following differences.

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1. The general ledger deals only with financial statements for external use

Unlike cost accounting, general ledger focuses on those who contribute funds to the business.

2. General ledger is based on historical data

Unlike cost accounting, which seeks to know the current economic status of an organization, general accounting is based on historical data from operations.

3. General ledger requires a chronological record

To carry out an analysis in the general accounting it is necessary to keep a chronological system of all the variables and financial operations, while cost accounting is applied to a process of analysis of the expenses that occur in the transformation of raw material to product .

4. General accounting is based on financial statements

For example, the balance sheet or the income statement. Cost accounting is a process where the costs of production, distribution, administration and financing of production are recorded, collected and interpreted.

Advantages and Disadvantages of Cost Accounting Over Other Accounting Approaches

Like any method, cost accounting, in addition to advantages for your company, can also present certain disadvantages when trying to implement it. Let’s dive a little deeper into both aspects

5 advantages of cost accounting

1. Cost verification

With cost accounting you can calculate the exact price to produce a product, so you will have an accurate verification of the expenses related to the production activities that your company carries out.

2. Greater utility

By collecting relevant information about expenses and optimizing product prices, you can get more profit.

3. Better performance

After collecting data on expenses, evaluating production performance will allow you to make appropriate decisions to improve performance.

4. Identification of losses

The analysis and recording involved in applying cost accounting also helps you find the causes of unjustified losses in your company.

5. Supervision and control

This area of ​​accounting is focused on supervising and controlling the movements of the production process in order to manage all your actions effectively.

3 disadvantages of cost accounting

1. Complexity

In order to effectively apply cost accounting, constant adjustments are required, as it does not have a single approach and it is not applicable in all processes.

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2. Specialized experience

In order to apply cost accounting effectively in your company, you need to make use of expert talent in the area. This means higher costs for your organization, as employees must also be trained to understand the relevance and method of data entry.

3. Lack of long-term visualization

Cost accounting is not the best tactic to make long-term decisions, because it focuses on improving the production process, but its lack of uniformity does not allow you to make future decisions.

The cost accounting cycle

The cost accounting cycle is a process that companies carry out during an accounting period for different objectives such as: identification of expenses, classification of costs, identification of total costs and determination of unit costs, sale price and cost control for decision making .

We’ll break down that cycle below for a better understanding:

  1. Data register: the objective is to determine and record the business aspect in which an investment is required. In this way, an approximate cost for its production can be identified.
  2. Cost classification: Once what the company requires is known, the cost is classified based on its function, need, behavior, among others.
  3. Identification of the total cost: All the expenses incurred for the production of a product or undertaking of a service or strategy are added.
  4. Obtaining the unit cost: This is obtained by dividing the cost of goods sold by the total units sold.
  5. Determination of sale price: a profit margin is added for the business.
  6. Performing cost control: When you already have the standard cost, budget and budget control system, another control is determined for making the right decisions.

Do not forget how important it is to do the financial analysis of your company. Cost accounting is a great way to do this, and as you saw in this text, it is simpler than it sounds.

Jerry Gordon

About Jerry Gordon

Webmaster, nature and tech lover. Jerry manages the day-to-day operations at DigiToolsadvisor. He loves enjoying his free time, but most of all, trying new tools to master.