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The Importance Of Cost Accounting
By Uma A Ilango
Managers rely on cost to provide an idea of the actual cost of processes, departments, operations or product which is the foundation of their budget, allowing them to analyze fluctuation and the way funds are used socially for profit. Cost is used in management accounting, where managers justify the ability to cut costs for a company in order to increase that company's profit. As a tool for internal use, versus a tool for external users like financial accounting, cost does not need to follow the GAAP standards (Generally Accepted Principles) because its use is more pragmatic.
Cost creates a financial value out of the production of a product, measuring currency that is nominal into units that are measured by convention. By taking recorded historic costs a bit further, cost allocates a company's fixed costs over a specific time period to what items are actually produced during that period of time, creating a total cost of product production. Products that were not sold during that period of time produced a “full cost” of those products, recording them in a complex inventory system that uses methods of its own that are in compliance
with the GAAP standards. Managers are then able to focus on each period's results as it relates to the “standard cost” of any product.
Any distortions in cost that were caused by calculating what the overhead of a product is versus what a unit cost is for companies that specialize in only one specific product are very minor in industries that mass produce that product with a low fixed cost. Understanding why costs vary compared to what was actually planned helps a manager to save a company money by taking actions that are appropriate to correct that variation in the future. Variance analysis is a very important part of cost because it breaks down each variances into many different components of standard cost and actual cost. Some of these components are material cost variation, volume variation and labor cost variation.
Cost is a very important part of the management process. In order for managers to determine the best methods to increase a company's profitability, as well as saving a company money in the future, cost is a necessary system in the management of a company's budget, providing important data to analyze fluctuation in company production costs.
Uma Ilango is a programmer from profession. She writes regulary at Bigarticlepool.com. Thousands of new articles are added every month.