What Is Element of Cost in Management Accounting?
Cost remains a constant, important topic in corporate boardrooms, often directing the tone and tenor of strategic conversations that corporate leaders have when considering investment options. Management accounting helps top executives understand the cost elements that effect corporate profitability, providing personnel upward in the hierarchy with the necessary tools to run thriving businesses.
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Identification
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In management accounting parlance, cost refers to an expense that an organization incurs in the production process or in the series of activities that lead from manufacturing to sale, according to the Federal Accounting Standards Advisory Board. Management accounting, also referred to as cost accounting, is the branch of accounting that helps organizations run economically sound operations. Within a corporate context, bookkeepers and cost clerks typically record costs by debiting and crediting financial accounts, such as assets, liabilities, revenues and expenses.
Significance
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Cost is a key element in management accounting because it forms the operating basis upon which organizations chart short-term and long-term strategies, make investment decisions and maintain financial solidity, according to Management and Accounting Web, an online management accounting educational resources provider. Without adequate cost management, a company may experience economic distress and file for bankruptcy.
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Historical Costing
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In a historical costing process, organizations value raw materials, semi-finished products and completely finished goods at their initial costs. For example, a company bought inventories for $1 million five years ago. The company may choose to value the goods at their historical cost--which is $1 million--when preparing financial statements at the end of the year, regardless of the goods' current worth.
Standard Costing
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Standard costs refer to predetermined prices that an organization assigns to finished goods as they go through the manufacturing process. Companies apply standard costs to assess process efficiency in their production mechanisms, measuring waste by comparing standard costs to actual expenses.
Budgeting
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Budgeting is a subset of management accounting, enabling all organizations--including nonprofits, businesses and government agencies--to control how operating costs effect their bottom lines or profit indicators. In budgeting activities, corporate leadership pays attention to how department heads and segment chiefs implement operating controls, focusing on differences between actual and planned costs. Companies also rely on monthly and quarterly financial statements to assess the effectiveness of budgeting practices. These accounting reports include balance sheets or statements of financial condition, statements of profit and loss, statements of cash flows and statements of retained earnings.
Considerations
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Cost accounting and financial administration demand analytical dexterity and a knack for solving complex problems. Professionals performing cost management work hail from various departments within the corporate production chain, and may include cost estimators, estimator project managers, construction estimators, manufacturing foremen and management accountants, according to the U.S. Department of Labor's Occupational Information Network (O*NET OnLine). To perform the required tasks effectively, corporate personnel typically use financial analysis software, project management applications, mainframe computers and cost accounting software.
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References
- Photo Credit Low Cost image by Marco from Fotolia.com
