6 IMPORTANCE OF COST ACCOUNTING

J.O. EMMANUEL
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Cost accounting is a branch of accounting that is concerned with identifying, ascertaining, classifying, assigning and controlling the costs of production.

The importance of cost accounting is explained below;

1. Aids in price fixation: In order to set a price for a product or service, a company must first understand the costs associated with producing or providing that product or service.

This is where cost accounting comes into play. 

Cost accounting helps a company determine the cost of its product or service, which it will then use in setting the price of its goods and services.

2. Eliminates wastage: Another benefit of cost accounting is that it helps companies eliminate wastage.

Cost accounting provides a detailed breakup of the cost of production and allows a company to analyze the costs associated with different aspects of the business, such as raw materials, labour, and overhead cost.

The information provided by cost accounting can be used to check various forms of wastage and make adjustments that will ultimately lower costs and increase efficiency.

These adjustments could include streamlining processes, implementing cost-saving techniques, or renegotiating contracts.

3. Allows for cost comparison:  Having detailed and accurate cost records allow for cost comparison, which is the process of evaluating and comparing the costs of different products, services, or production techniques. 

A company might use cost records derived for cost accounting, for instance, to compare the costs of making a product using two different production techniques.

By doing this, the company can improve its efficiency, reduce costs, and optimize its profit. 

For example, if a company finds that one production technique is more expensive than the other, it may choose to switch to the less expensive technique in order to save money. 

4. Aids in inventory control: Cost accounting provides management with the information needed to effectively control inventory levels.

It provides detailed information on the costs associated with acquiring and holding inventory.

This information can then be used to identify slow-moving or obsolete inventory, which needs to write off or sold at a reduced price.

5. Essential for managerial decision: Cost accounting is crucial for management decision-making since it enables managers to make well-informed decisions that can enhance the company's operations.

Cost accounting help managers understand the financial impact of their decisions and identify areas where cost savings decisions are to be made.

Based on the cost information that cost accounting provides, managers decide which goods or services a company should keep offering.

Generally speaking, a manager may decide to cease a company from selling a product if the cost of production is much more than the selling price.

6. Cost classification: Cost accounting is also important because it allows the company to classify their costs.

Cost may be classified into fixed cost and variable cost, direct cost and indirect cost, and sunk and future cost.

Companies classify costs into different categories so that they can understand the various cost associated with producing goods and services.

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