Cost accounting is an approach to evaluating the overall costs that are associated with conducting business. Generally based on standard accounting practices, it is one of the tools that managers utilize to determine what type and how much expenses is involved with maintaining the current business model. At the same time, the principles of cost accounting can also be utilized to project changes to these costs in the event that specific changes are implemented.
When it comes to measuring how wisely company resources are being utilized, cost accounting helps to provide the data relevant to the current situation. By identifying production costs and further defining the cost of production by three or more successive business cycles, it is possible to note any trends that indicate a rise in production costs without any appreciable changes or increase in production of goods and services. By using this approach, it is possible to identify the reason for the change, and take steps to contain the situation before bottom line profits are impacted to a greater degree.
Product development and marketing strategies are also informed by the use of cost accounting. In terms of product development, it is possible to determine 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. 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.
Cost accounting is helpful in making a number of business decisions. By weighing the actual costs versus the anticipated benefit, it can help a company to avoid launching a product with no real market, prevent the purchase of unnecessary goods and services, or alter the current operational model in a manner that will decrease efficiency. Whether utilized to evaluate the status of a department within the company or as a tool to project the feasibility of opening new locations or closing older ones, cost accounting can provide important data that may impact the final decision.
