What is cost accounting?

Cost accounting is an approach to assessing the indirect costs associated with conducting business. Generally based on standard accounting practices, cost accounting is one of the tools managers use to determine what type and how much expense is involved in maintaining the current business model. At the same time, cost accounting principles can also be used to project changes in these costs should specific changes be implemented.

When it comes to measuring how wisely a company's resources are being used, cost accounting helps provide the data relevant to the current situation. By identifying production costs and further defining the production cost over three or more successive business cycles, it is possible to observe any trends that indicate an increase in production costs without any appreciable change or increase in the production of goods and services. By using this approach, you can identify the reason for the change and take steps to contain the situation before the financial benefits are affected further.

Product development and marketing strategies are also based on the use of cost accounting. In terms of product development, it is possible to determine whether a new product can be produced at a reasonable price, given the cost of raw materials and the labor and equipment required to produce a finished product. At the same time, marketing protocols can make use of cost accounting to project whether the product will sell enough units to make production a viable option.

Cost accounting is useful in making various business decisions. By weighing actual costs versus anticipated benefits, cost accounting can help a company avoid launching a product with no real market, avoid purchasing unnecessary goods and services, or change the current operating model in ways that decrease profitability. Whether used to assess the situation of a department within the company or as a tool to project the feasibility of opening new locations or closing old locations, cost accounting can provide important data that can affect the final decision.

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