The Importance Of Cost Accounting

The business environment focuses on making healthy investments and earning sizeable profits. Several companies in the same industry or even suppliers who provide heterogeneous products allow customers the opportunity to select from an immeasurable variety. Hence, those companies have to strive for recognition, remain spirited and match their competitors’ offers. Because competition is the driving force in business, it hinders companies’ growth and profit making abilities. Nevertheless, companies can overcome this obstacle by controlling or minimizing costs. However, if a company wants to lessen cost, it has to understand the cause and effect relationship between cost and its activities. Kocakulah stated that controlling expenses in a bank can

According to Eldenburg and Wolcott, Cost Accounting has been used to make decisions, to measure, monitor and motivate performance, to analyze the profitability of customers, and to coordinate transactions with suppliers extending traditional cost accounting beyond the walls of the organization (8-9. All other references to Leslie G. Eldenburg and Susan K. Wolcott’s Cost Management Measuring Monitoring, and Motivating Performance will be indicated by page reference to this text.). There are various costing methods used to cost goods and services. The two primary costing methods used today. One is Traditional Based Costing (TBC), which involves Job Costing and Process Costing and the other is Activity Based Costing (ABC). Either costing method could be used depending on the companies’ size and activities. Whilst companies seek to find profitable opportunities, Dyer states that the key to being profitable is through accuracy. He further adds that if the information regarding the cost of producing goods and or services is not accurate, job bids may be too high or too low. Consequently leading to overall losses in the company either way.

The Consortium for Advanced Manufacturing-International, which is now CAM-I, played an essential role for studying and compiling together the principles known today as Activity-Based Costing. Robert S. Kaplan and W. Bruns composed a book in 1987 called, Accounting and Management: A Field Study Perspective, which dedicated a chapter to ABC costing. ABC costing was initially focused on the manufacturing industry because of increasing technology and productivity improvements. Robin Cooper and Robert Kaplan also published several activity based costing articles in the Harvard Business Review during the 1980’s. As said previously, if a company wants to lessen cost, it has to understand the cause and effect relationship between cost and its activities. Hence, ABC costing seeks to identify cause and effect relationships in order to objectively assign costs. Once the costs of activities have been identified, the cost of each activity is attributed to each product to the extent that the product uses the activity. In this way ABC often identifies areas of high overhead costs per unit and so directs attention to finding ways to reduce the costs or to charge more for costly