Cost accounting is the branch of accounting where the cost is analyzed to distribute the cost associated with the services, product, and process. After calculating the total cost, and profit the cost of the final product in the market is decided. The cost engaged in the business is from three components like material, labor, and other expenses.
Objectives of cost management
- Cost management is helpful to charge a cost per product out of total production.
- To analyze the different types of costs associated with the product.
- Cost accounting is to identify the cost of wastage with time, material, machinery, and expenses.
- In the process of different products, it is easy for the management to decide about the materials used, the time used for production, and the profits associated with each product.
- Cost management is to collect all the data regarding the manufacturing and distribution of the product.
- The capital locked or working capital shows the cash unlocked. The capital is used for the management of the inventory, work-in-progress, and finished goods. With the help of cost accounting, these details are calculated.
- The control over the cost dispersed among the materials, overheads, and labor at a reasonable rate.
- As the cost and capital are associated, it is useful for the management to know the proposed capital projects.
- As the cost and performance are the associated ones, it is helpful for the management to evaluate the performance.
- After knowing cost estimation, Budget plan and budgetary control are executed.
- The different departments are associated with different types of costs. Cost management is like an information system to manage all the departments.
- Cost estimations are useful for the human resource development department to decide about the bonus or incentive plans.
- Cost management is helpful during the audit as it has data regarding all the departments.
Techniques of cost management
Activity-based costing, quality management, JIT inventory management, target costing, and balanced scorecard are the different methods used to control the cost. Let me look at these cost management techniques in detail.
- Under the first method, the cost is as per the activity. The overhead needs to divide as per the production units. It is difficult for the management to divide the indirect cost in case of administration expenses, salary, and management costs. Activity-based costing by understanding the relationship with the products and services helps for cost allocation. ABC method is used mostly in the manufacturing companies. List the activities of the organization, divide the activities as per the cost pools, divide the cost drivers, divide the cost with the cost driver, and finally multiply the number of cost and cost driver rates. ABC method divides the overhead as per the activity like direct labor cost and machine hours. The low volume product and high volume product generate the cost. And these costs are equally distributed with the ABC method.
- Under the Quality management method, the process and the control over the process are the components to implement quality. Here all the members of the business contribute to reduce the real cost and improve the quality of the product and services.
- JIT is the method that focuses on wastage. The cost of inventory is reduced by maintaining fixed time with raw material and finished goods. This method is possible with prompt service from the suppliers for cost management.
- Target costing is calculating the costs with the targeted profit. In a business environment with high competition, the difference between the marginal expectation and customer expectation is considered as the final cost.
- The balanced scorecard method is one of the management systems to track the day to day work. This method is helpful to prioritize the projects.
The cost reconciliation statement reveals the accuracy in the financial statements. Controlling the cost with the budget leads to the prediction of future expenses. Cost management is very crucial in the acquisition of the business. The traditional method of cost management is not customer-centric, and it is said as financial aspects oriented one. In a business environment, dynamic forces create competition. And to manage competition from rivals, it is essential to know the price which customers prefer to buy. Financial performance shows the perspective of the shareholder. Cost management is to manage the expectation of the buyer. Thus, cost accounting acts as a guide to the future policies of the business.