What is the Relevance of Cost Accounting in Planning and Budgeting for a Corporation?

Cost accounting and budgeting are critical for every type of business. The accounting technique allows efficient utilization of resources for businesses. There are different cost accounting benefits for businesses.

Outsourced bookkeeping companies record accounting transactions that form the basis of cost accounting and budgeting. In this blog post, you will learn about the benefits of cost accounting in budgeting and planning for a corporation.

What is Cost Accounting

Cost accounting helps businesses protect margins by monitoring indirect and direct costs. The information from the reports presented by the outsourced bookkeeping service providers can result in improved budgeting and ultimately improved profit.

Different types of cost accounting methods are suitable for different companies.

1. Lean Cost Accounting

Lean cost accounting is suitable for manufacturing firms that have implemented lean manufacturing processes. The type of cost accounting involves calculation of product cost based on conservative estimates. The cost accounting method is applicable for companies with lean inventory management system. The technique involves spreading inventory value over time for a more accurate representation of profit and loss figure.

2. Activity Cost Accounting

The cost accounting method involves allocating costs based on the individual business activity. The cost accounting technique involves cost allocation for each product line based on activities of the business.  

3. Standard Cost Accounting

Standard cost accounting is the most common accounting method. This method involves calculating costs for different product lines based on historical cost.

4. Marginal Cost Accounting

Marginal cost accounting involves considering variable cost for costing products. The cost accounting technique does not involve allocation of a percentage of fixed cost unlike other accounting techniques. The fixed costs are not allocated to specific products since the costs are assumed to be paid irrespective of a specific activity.

The Use of Cost Accounting for Budgeting

Cost accounting reports serve as a budgeting tool. The accounting activity is used by professionals to efficiently manage the funds. Cost budgeting involves totaling all costs for a certain time period. The cost accounting method involves creating a professional plan to manage the funds.

Cost budgeting allows forecasting of assets and also the sales generated by the assets. It helps in effective utilization of funds to maximize profits.

Cost budgeting involves planning for both operational cost and depreciation. Assets such as equipment and vehicles depreciate value over time.

With cost budgeting, you can make choices about the efficient use of funds to make products. It allows you the opportunity to utilize the resources to minimize cost and maximize revenues. The activity of cost budgeting involves optimizing the opportunity cost.

What is an opportunity cost?

A simple example will let you understand its importance in cost budgeting.

Suppose that you have two choices in use of the financial resource. You can buy product A that cost $20,000 and will generate $50,000 in a given year or select product B that cost $40,000 and will generate $60,000 profit.

By selecting product B, you forgo the higher net income that is known as an opportunity cost. The opportunity cost should be properly analyzed when creating a budget. The cost occurs when you decide to select one option over the other.

Another important element of cost accounting is the cash flow management. You have to budget for cash inflows and outflows. It is important that the cost of items or cash outflow does not result in problems for the company in meeting financial obligations. In other words, you have to decide whether you have a positive cash balance after deducting cash outflows from cash inflows.

The Importance of Cost Accounting in Budgeting

Cost accounting has many benefits for different stakeholders. Employees, management, investors, government and other agencies benefit from the cost account reports. Here are some of the benefits of cost accounting for business management.

1. Cost Management

Cost accounting involves allocating different types of costs. The costs can be classified as selling cost, administrative cost, direct cost, and indirect cost. The allocation of cost in such a manner allows the management to control different types of costs.

Management can control the cost of labor, inventory and other overhead cost with cost accounting and budgeting. As an example, the management can use economic order quantity (EOQ) costing method for optimum inventory management. In addition, the management can analyze the efficiency of labor and machinery to reduce cost.

2. Price Management

Cost accounting also helps in determining the best price of products. The price of products are determined based on analysis of both fixed and variable costs. This allows the management to find out the best price for the products and services that are neither too high nor low.

3. Set Benchmarks

Cost budgeting also allows the management to set cost standards for different activities. The accounting method allows the management to estimate the future costs. It allows preparation of budgeted reports that can serve as the basis of improved financial decisions.

Conclusion

Cost accounting and budgeting is important for all types of organizations. Small and large organizations can benefit from cost accounting. The process of cost accounting allows businesses to set benchmark cost and measure performance of the business.

Cost accounting helps improve the efficiency of the business process. It allows the business management to know about the efficiency of labor and assets in generating revenues. The cost accounting report serves as a tool to improve the operational efficiency of the business.

The ultimate aim of the cost accounting and budgeting is to improve the profitability of the company. Cost accounting measures help businesses to minimize costs and boost profitability. The cost accounting reports prepared by experienced accountants (CPAs) also allow businesses to fix price and control cost of production.

Maxim Liberty is a professional outsource bookkeeping service provider. We have a team of highly experienced CPAs who can record business expenses based on generally accepted accounting principles. The accounting statements prepared by our company can help your staff to prepare accurate cost accounting budgets and reports. You can contact us by dialing (703) 957-6938.