Cost accounting is a business practice that takes a look at the overall expenses of a business. It involves establishing a budget, evaluating actual costs of operations and products, and evaluating profitability. Cost accounting is a very useful tool for management when making decisions that will determine the direction that the company goes. Indeed, cost accounting has been at the foundation of many a business decision.
Part of cost accounting is evaluating how the company utilizes its resources. Resources cover practically everything that the company has - manpower, equipment, raw materials, etc. The aim is to determine the current cost of the resources and to project the costs for the next two or three business cycles. Cost accounting requires that the trend of the cost be analyzed and then compared to changes in production. Based on the data gathered, the company can decide to implement changes if necessary.
Cost accounting is also necessary when a new product or service is being considered. The cost of creating the product or service is analyzed by looking at the manpower, raw materials, equipment, etc. The management then makes decisions as to whether or not the cost of making the new product or creating the new service will allow the business to make a profit. In this scenario, marketing and promotion activities are also taken into consideration. At the end of the day, if the total cost is too high and the margin of profit not satisfactory, the company may decide to forego the creation of a new product or service.