What is the Value of Cost Accounting?

Cost accounting is the process of collecting information, measuring, calculating, analyzing the results, inferring and accounting the cost information. It is highly important and essential for the external and internal stakeholders and stockholders of the business organization. The external stakeholders are financial companies, who provide mortgage loans in the trust of the organization, banks that provide loans to the company and investors who purchase a share from the organization. The internal stakeholders include division heads, employees, managers, managing directors, chief executive officers, and company directors.

Benefits of Cost Accounting

Cost accounting serves as a vertebra of the company. It converts the accounting data into valuable knowledge, information and insight of the business body’s operations for reasons like, managing or reducing costs, identify the prices of services and goods, determining the costs involved, modify or discontinue an activity or a program, helps to implement a plan or authorize and aids to measure performances of the organization.

Another important benefit of cost accounting is it helps the management to decide and estimate the future cost. The managers can start to calculate the future risks, and start to prepare and evaluate the budget requests. When the manager approves and executes the budget, the cost accounting helps to give a response to performance. It can be used to compare the assumed benefits or known benefits to nonvalue added activities, and value added activities.

Cost accounting is highly important for effective management, and it plays a crucial role in the activities and programs of the business operations. It helps to enhance the effectiveness and efficiency of operations by assisting the managers and other department officers with necessary cost based information and performance results. This way, it helps to deliver continuously successful results to stakeholders.

The practice of cost accounting is followed since early times. It informs the managers about the costs and expenses involved in running a business. The modern cost accounting originated during the industrial rebellion. Since the managers and business owners found hard to run large business accounting systems, they started to develop a new system called the modern accounting system. It records and tracks the costs and expenses of a business. It helps the managers and business owners to take critical decisions, prepare budget and forecast the expenses.

The modern managers calculate by dividing the cost into a variable cost and fixed cost. A variable cost is the cost that keeps changing with the production of the business. Some of the examples include raw materials, energy, labor, etc. It also deals directly with the production and changes if the production increase or decreases in a business. A fixed cost remains static and does not change though the production varies. The examples of fixed cost include insurance premiums, loan payments, rent, etc. The variable cost help to identify the cost involved in the production of one unit and managers can take decisions according to it. The variable cost also helps in fixing the price of a product.

Cost accounting is an essential element from the smallest of enterprises to the largest of multinational companies. You need to implement cost accounting practice and concepts to manage a successful business entity.

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