| This can be described as the process of | | | | In the early industrial age, most of the |
| accumulating, measuring, analyzing, | | | | costs incurred by a business were what modern |
| interpreting and reporting cost information | | | | accountants call "variable costs" because |
| that is both useful and relevant to the | | | | they varied directly with the amount of |
| internal and external stakeholders of a | | | | production. Money was spent on labour, raw |
| business entity. External stakeholders are | | | | materials, power to run a factory, etc. in |
| those who have a vested financial interest in | | | | direct proportion to production. Managers |
| a business or company. For example banks | | | | could simply total the variable costs for a |
| (loans), financial houses (mortgages), | | | | product and use this as a rough guide for |
| investors (investments), etc. Internal | | | | decision-making. |
| stakeholders are the business or company | | | | |
| directors, managers, division heads, etc. | | | | Some costs tend to remain the same even |
| | | | during busy periods, unlike variable costs |
| One of the many benefits of cost accounting | | | | which rise and fall with volume of work. Over |
| is that it turns data into information, | | | | time, the importance of these "fixed costs" |
| knowledge and wisdom about a business | | | | has become more important to managers. |
| entity's operations that is useful for: | | | | Examples of fixed costs include the |
| | | | depreciation of plant and equipment, and the |
| - measuring performance | | | | cost of departments such as maintenance, |
| | | | tooling, production control, purchasing, |
| - reducing or managing costs | | | | quality control, storage and handling, plant |
| | | | supervision and engineering. In the early |
| - determining the fees or prices for goods | | | | twentieth century, these costs were of little |
| and services | | | | importance to most businesses. However, in |
| | | | the twenty-first century, these costs are |
| - deciding to authorize, modify or | | | | often more important than the variable cost |
| discontinue a program or activity Another | | | | of a product, and allocating them to a broad |
| benefit is that information on the costs | | | | range of products can lead to bad decision |
| programs and activities may be used as a | | | | making. |
| basis to estimate future costs in preparing | | | | |
| and reviewing budget requests. Once budgets | | | | In modern accounting, costs are measured in |
| are approved and executed, cost information | | | | accordance with Generally Accepted Accounting |
| serves as a useful feedback on performance. | | | | Principles (GAAP). In accordance to GAAP the |
| Moreover, costs may be compared to known or | | | | principle is to record historical events and |
| assumed benefits to identify value-added and | | | | assign a monetary value to each event that |
| non-value added activities. Reliable | | | | has taken place. Costs are measured in units |
| information on the cost of programs and | | | | of currency by convention. Cost accounting |
| activities is crucial for the effective | | | | could also be defined as a kind of management |
| management of a business entity's operations. | | | | accounting that translates the Supply Chain |
| Cost accounting is especially important for | | | | (the series of events in the production |
| fulfilling the objective of assessing | | | | process that, in concert, result in a |
| operational performance. The objective is to | | | | product) into financial values. |
| improve the efficiency and effectiveness of | | | | |
| operations by furnishing program managers and | | | | In conclusion, for any business entity - from |
| others with timely and relevant cost-based | | | | the smallest business enterprise to the |
| performance information to allow for | | | | largest multinational corporation - to be |
| continuous improvement in delivering outputs | | | | successful requires the use of cost |
| and outcomes to stakeholders. Cost accounting | | | | accounting concepts and practices. It |
| has been with us since early times to help | | | | provides key data to managers for planning |
| managers understand the costs of running a | | | | and controlling, as well as costing products, |
| business. Modern cost accounting originated | | | | services, and customers. The central focus is |
| during the industrial revolution, when the | | | | how it could help managers make better |
| complexities of running a large scale | | | | decisions. For this reason businesses and |
| business led to the development of systems | | | | companies hire cost accountants and they are |
| for recording and tracking costs to help | | | | increasingly becoming integral members of |
| business owners and managers make decisions. | | | | decision-making teams instead of just data |
| | | | providers. |