One of the first questions I ask our Inventory Management students is, “Do you know your operating costs?” and our Production Planning Management students, “Do you know the cost of manufacturing one of your items?” After five years of training, I can count on one hand how many students were able to answer these questions, which immediately tells me that your company does not use cost accounting.
The reason why students cannot answer the question is that their company only has what is known as operational and financial accounting. Management accounting focuses on historical and estimated data management needs to run ongoing operations and perform long-term planning. The purpose of management accounting is to gather financial information to make economic decisions.
Financial accounting focuses on collecting historical financial information used in preparing financial statements that meet the needs of investors, creditors, and other external users of financial information. The statements include a balance sheet, an income statement, a retained earnings statement and a cash flow statement. Although these financial statements are useful for both management and external users, they require additional reports, schedules, and analysis that management can use in planning and controlling operations.
Management and financial accounting focus on the company’s operations as a whole and cannot provide the details needed to accurately determine product costs and prices. You can only give average values. In addition, cost accounting provides the detailed cost information management needs to control ongoing operations and plan for the future. Management uses this information to decide how to allocate resources to the most efficient and profitable areas of the business.
Cost accounting allows management to properly allocate costs such as raw materials, labor, and other factory resources to the actual products used, and then average them across all products. Without cost accounting, expenses such as major investments in property, plant and equipment, workforce development, depreciation, taxes, insurance, utilities, machine maintenance and repair, material handling, production setup, production planning, sales and administrative expenses are usually lumped together to produce an overhead price , which is added to a product as an overhead markup. The true cost of a product is never determined, meaning the company overcharges for some products and undercharges for others.
Cost accounting principles were developed to allow manufacturers to process the many different costs involved in manufacturing and to provide built-in control functions. The information generated by a cost accounting system provides a basis for determining accurate product costs and selling prices, and helps management plan and control operations.
Determination of product costs and prices
Cost accounting techniques provide the means of determining product costs that enable the preparation of meaningful financial statements and other reports needed to run a business. The cost accounting information system must be designed in such a way that it enables the determination of both unit costs and total product costs. Unit cost information is also helpful in making important marketing decisions such as: B. to determine the selling price of a product, measure yourself against the competition, bid on contracts and analyze profitability.
planning and control
One of the most important aspects of cost accounting is the creation of reports that management can use to plan and control operations. Planning is the process of setting goals or objectives for the company and determining the means by which they will be achieved. Effective planning is facilitated by clearly defined manufacturing process goals and a production plan that supports and guides the company in achieving its goals.
Cost accounting information improves the planning process by providing historical costs that serve as a basis for future projections. Management can analyze the data to estimate future costs and operating results and to make decisions about acquisitions of additional facilities, changes in marketing strategies and the availability of capital.
Effective control is achieved by assigning responsibility for every detail of the production plan through the establishment of cost centers. All managers should know exactly what their responsibilities are in terms of efficiency, operations, production and costs. The key to proper control is using accountability accounting and cost centers by regularly measuring and comparing the results and taking the necessary corrective actions.
Thanks to Mark Fleming | #Cost #Accounting #Missing #Component #Supply #Chain #Management