In order to control internal operations and make sound business decisions on behalf of their business, managers need pertinent information on which to base their decisions.
When it comes to manufacturing, most organizations use complex accounting and data systems to manage inventory and track raw materials, production, labor hours, maintenance and repairs, storeroom supplies and more.
While financial accounting focuses on a company’s stockholders, managerial accounting focuses on internal operations and provides the manager the tools needed in order to evaluate operations and make necessary changes.
We can assume the two primary objectives of an effective manager are:
- Producing the right inventory when needed for manufacturing and sales
- Minimizing (and reducing) inventory costs.
One of the key tools a manager will rely on in order to meet these two objectives is the method of cost accounting — the process of accumulating, measuring, analyzing, interpreting and reporting production and other operational cost information that is both useful and relevant to the internal and external stakeholder of a business.
In simple terms, cost accounting helps the manager make sense of seemingly unrelated data over a determined time series, in order to help safely navigate the business toward long-term viability.
The main benefit of cost accounting is that it converts mere data into insightful information, which, in turn, leads to wise decisions about the business that provides the manager with:
- Clear performance metrics
- Reduced and/or manage costs
- Accurate pricing for goods and services
- Confident decision making
Cost accounting essentially helps a manufacturer control on going costs, as well as the ability to make important decisions moving forward.
A good example would be using information costs that can be used as a basis to estimate future costs when preparing and reviewing budget requests. Once budgets are approved and executed, cost information serves as a useful feedback on performance.
Additionally, costs can be compared to known or assumed benefits to identify value-added and non-value added activities. Reliable information on the costs of processes and activities is important to management efficacy as it pertains to business operations.
In order to assess operational performance, a manager must employ cost accounting with the objective of improving the efficiency and effectiveness of operations by furnishing program managers and others with timely and relevant cost-based performance information.
This allows for continuous improvement in delivering outputs and outcomes to stakeholders.
Regardless of size, manufacturing success can many times be attributed to cost reductions rather than production increases. In essence, profitability is increasingly less a factor of how many things produced, and more the outcome of what savings can continuously be gained through cost reductions.
It is this vital understanding and use of cost accounting concepts and practices that allows a manager to spot necessary adjustments in both fixed and non-fixed costs. And it provides key data to managers for planning and controlling, as well as costing products, services and customers.
As complex as cost accounting can be, realizing the patent benefits of using the pertinent data to aid the manager in the decision making process is integral to the long-term success of the manufacturer.
Are you a manufacturer? Do you have questions regarding accounting methods, processes and best practices for your business? If so, contact our Onisko & Scholz team today.