Cost Accounting. What benefits contribute to the company.
Cost Accounting is a very important function included in the area of Analytical Accounting or Management Accounting.
The cost of a product or service is composed with the necessary “resources” that add value to it.
As an example, the “resources” necessary to calculate the cost of a product or service may be the raw materials necessary to produce a product, the machine hours necessary to manufacture the product, the hours of direct employees who participate in the production of the product, or the execution of the service or the project.
These resources add value to the product since without them its existence would be impossible.
For example, a bicycle is composed with a series of parts, handlebars, brakes, wheels, pedals, saddle … and the time consumed by the employees for its assembly. The sum of the cost of each of the components and the time consumed generates the cost of the product. Without these resources we could not make a bicycle.
The same happens when calculating the cost of a project or a service. They need resources that add value to them, such as hours of employees in tasks to be executed, the consumption of materials or the outsourcing of services.
Without these resources it would be impossible to develop a project or perform a service.
How are the necessary resources that add value to the product, project or service economically valued?
Here comes the complexity because it will depend on when we want to calculate the cost of the product, project or service.
If we need to calculate the cost of the product before manufacturing or after manufacturing.
If we have to calculate it before it is manufactured then we need the resources to have an expected value, which is named “standard cost”.
If we need to calculate the cost of the product once manufactured we can use real values (for example in the case of raw materials we can apply the fifo, lifo or average price valuation method) and in the case of direct personnel we may have to continue using the standard cost for a simple reason. We cannot really know the cost of the personnel until the accounting for the month has been closed. Therefore in many cases we will use a combination of actual costs and standard costs for the calculation.
The same happens in the case of projects or services.
What is the goal of cost accounting?
There are 3 basic objectives in cost accounting:
The calculation of costs. This is the main function on which the other functionalities of this management accounting function are based.
Cost control. Its objective is to optimize the value of a product, project or service based on the budgetary restrictions established by the administration. If a project has a target cost of 1,000 because we anticipate the consumption of a certain number of hours and materials and the actual cost is 1,500, we must analyze the causes of the deviations and prevent them from happening again.
But before the cost of 1,500 is generated, we can control the consumption of resources and their value to try to reach the 1,000 budgeted. Through cost control we can act to achieve the expected result.
Cost reduction. This goal is often misunderstood as it should actually be named “cost optimization”. We cannot remove the pedals or the saddle from the bicycle to reduce the cost of the product, we cannot eliminate the work of a production process and we cannot reduce costs without affecting the quality of the same since we would reduce the market value of the final product .
But we can optimize the costs, for example use more efficient production processes, looking for suppliers that offer materials with the same quality at the best price, improving direct personnel processes to be more efficient and produce more units in less time.
Or be more efficient in the development or execution of a project to reduce the hours necessary to complete it with the requirements and quality agreed with the client.
In this way we maintain the value of the final product or project, but having optimized costs.
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