Cost Accounting: What Is It and Why Is It Important?

cost-accountingIf you are a small business owner, chances are that you depend on a timely set of financial statements (a balance sheet, income statement, and cash flow statement) prepared using generally accepted accounting principles, or GAAP, to provide you with a multidimensional view of the company’s financial health. That being said, there are most likely a series of other improvised reports that you run (probably on a spreadsheet) because the financial statements are not as useful when it comes to the day-to-day running of the business. By design, GAAP is continually being molded into a set of rules to report transactions in a way that fairly represent an entity’s business performance.  Lenders and investors have come to rely on this form of presentation so this has become the standard.  While there is no question of the value of financial statements prepared under GAAP, to more effectively manage your business you need different information to supplement those financial statements. That is where cost accounting comes in.

At the highest level, cost accounting is the branch of accounting that focuses on the assignment of costs. A critical component in the management of any business is developing the true cost of producing a product or delivering a service. By way of multiplication and division, it is relatively easy to assign direct costs (labor and supplies) to a product.  However, it becomes trickier when trying to apply costs that are indirectly related.  For example, what portion of the phone bill or administrative staff salary should be applied to a unit produced?  How do you factor in downtime due to routine maintenance? How should overhead be applied if multiple products use many of the same resources? The ability to properly apply indirect of a product or service creates an opportunity for you to see the true cost of operations as well as to objectively quantify profitability per product or service. Fortunately, methodologies have been developed to address these and countless other issues faced by business owners every day.

Cost accounting can provide you with data to supplement the information you are currently receiving from your financial statements; this allows for more effective budgeting and planning, and will improve your internal control.  If you have not yet implemented a cost accounting system into your business, we encourage you to consider doing so.

If you have any questions regarding cost accounting, please give us a call at 314-993-4285 or email us at office@hkaglobal.com

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