Basics of Cost Accounting

Cost accounting is quite different from financial accounting as it involves the process of translating the costs that a company has spent into the practical analysis. As a business owner, it is crucial for you and your cost accountants to understand the basics of cost accounting as it helps your company to improve operations as well as to generate profits. If you cannot afford to hire in-house accountants for your company, why not consider outsourcing the accounting tasks to an accounting firm in Johor Bahru? The experts will be able to give you some insights about cost accounting. Also, you must know these basics as they can give you some support in decision making.

Firstly, you need to know the types of costs that your business incurs, which may include the following:

–       Product costs

You need to identify only the variable costs which are related to a product. Then, sum up those costs for every product you produce or sell. Usually, you can do so by using the bills of materials. When you have this information with you, you will be able to determine if the prices that you have fixed for the products are way too low. If the price you set for a particular product is lower than the total variable costs, you will suffer a loss for every unit you sell.

–       Production line costs

You should add up the variable costs of all the products in one production line and the overhead expenses which are particularly related to it. Some costs that may be included in them are costs that are related to the factory overhead, production equipment and so on. You can use this information to decide whether expanding the sales of a specific production line or shutting it down would be more profitable.

–       Cost of workers

To calculate it, you need to identify and sum up all types of benefit, compensation, travel costs and others that you have spent on every worker. Then, you may compare this information to their respective output for you to identify which workers are the most cost-effective to your business.

–       Costs for the sales channel

If you want to identify the profitability of sales channel, you may combine the variable costs of products that your company has sold via certain sales channels with the overhead costs that are specifically associated with them.

–       Customer costs

You may sum up the variable costs of products and other costs which you can trace to the customers directly so that you can identify which are profitable. As a result, you may reduce your customers selectively and only choose those that you want to do the business with.

Besides, you should also understand two types of analysis, which are the constraints analysis and the cost (Also see What is Meant by the Term “Cost Pool”?) reduction analysis.

–       Constraints analysis

Usually, the company will have a bottleneck which restricts the sum of profits that it can earn. Hence, you, as the business owner, should use cost accounting to trace how your company uses the constraint, the expenses required to run it, as well as the throughput that it generates.

–       Cost reduction analysis

If your business has experienced a decline, you should find ways that enable you to cut down costs carefully while still maintaining the basic functions of your company. In this case, you may use cost accounting (Also see Differences Between Financial Accounting and Cost Accounting) to identify the costs that are discretionary so that you may defer or remove them without causing any harm to your business.