Cost accounting is the process of collecting and interpreting information to determine how an organization earns and uses funds. There are multiple advantages to using cost accounting, since it provides vastly more actionable information than the financial statements produced through financial accounting. Here are the key advantages of cost accounting to consider:
- Cost object analysis. Revenues and expenses can be clustered by cost object, such as by product, product line, and distribution channel, to determine which ones are profitable or require further support.
- Discovers causes. An effective cost accountant not only locates problems within a company, but also drills down through the data to determine the exact cause of the issue, and also recommends solutions to management.
- Trend analysis. Costs can be tracked on a trend line to discover expense surges that may be indicative of long-term trends.
- Modeling. Costs can be modeled at different activity levels. For example, if management is contemplating the addition of a second shift, cost accounting can be used to derive the additional costs associated with that shift.
- Acquisitions. The cost structures of possible acquisition candidates can be examined to see if costs can be pruned in some areas, thereby justifying the cost of the acquisition.
- Project billings. If a company is billing a customer based on costs incurred, cost accounting can be used to accumulate costs by project and roll this information into customer billings.
- Budget compliance. Actual costs incurred can be compared to budgeted or standard costs, to see if any part of a business is spending more than expected.
- Capacity. The ability of a business to support increased sales levels can be examined by exploring the amount of its excess capacity. Conversely, equipment that is idle can be sold off, thereby reducing the asset base of the organization.
- Inventory valuation. The cost accountant is usually tasked with accumulating the cost of inventory for financial reporting purposes. This includes charging direct labor to inventory, as well as allocating factory overhead to inventory.