Cost Accounting: An integrated approach to leverage business costs

Hey there! TallyDekho is going to discuss the concept of cost accounting and how this integrated approach plays a vital role in leveraging the business costs enabling the efficient and effective functioning of the organization. In today’s article, we’ll learn the various types of costs and how their effective management can help in bringing the business costs to the minimum.

Costs and expenses are the most crucial elements of a business that cannot be avoided under any circumstance. From a large scale business organization to a small retail shop, every business incurs expenses in conducting day-to-day operations. Hence, an effective cost management tool is required for sticking the costs to the minimum level possible.

What is Cost Accounting?

The term cost accounting refers to the estimation of the company’s overall cost of production by segregating the various types of costs like variable cost, fixed costs and so on.

It is basically a type of managerial process wherein the management uses it to make the ideal decisions for the business prospects. Unlike financial accounting, which lays a statement for outside parties, the cost accounting lays the cost estimation statement for the management of the company itself.

Types of cost accounting

Basically, there are four types of cost accounting:

• Standard Costing
• Activity-based costing
• Lean accounting
• Marginal costing

Objectives of Cost Accounting

• To increase the return on investment by leveraging the business costs
• To understand the various types of business costs
• To improve resource planning and allocation
• To identify the waste factors and eliminate them
• To enhance the overall working capacity of the organization

Classification of Costs

In business, there are several types of costs, however, every cost varies in importance and its respective type. But, for a clear understanding of the various types of business costs, below are the major types of costs that almost every business incurs.

Fixed Costs

These costs remain constant irrespective of the level of production. It doesn’t matter if the manufacturing unit is producing 10000 units or zero production, the fixed cost remain the same at every level. Thus, this cost is unavoidable that means, the business has to carry it even if there is no production at all.

Variable Costs

These costs vary with the production level. As the production increases, the variable cost will also increase and as the production decreases, it will decrease too.

Operating Costs

Operating costs are the expenses that are related to day-to-day business maintenance. These costs are directly linked to the operations of the business as it captures the costs incurred at the operational level.

Direct Costs

The costs that have a direct impact or are directly tied to the production of goods and services are known as direct costs.

Indirect Costs

These are opposite to the direct costs, the costs that do not affect the business directly, or are not tied directly to the business are known as indirect costs.

Significance of Cost Accounting in the Business

Just the way financial accounting helps the outside investors and parties to see if they should invest in the business proposal or not, in the same way, cost accounting helps the management of the company itself to make efficient decision making by leveraging the business costs in such a way that the business yields the maximum output by taking in minimum input.

Helps the management in decision-making

Cost accounting is a managerial process that helps the company’s management to make the best decisions for the business after thoroughly estimating costs.

Optimize the budget in the best possible way

After preparation of the cost budget, the cost accounting tool helps in optimizing the budget and find out the errors and make it the most effective thereof.

Allocate the resources as per the extent of their requirement

The statement of cost accounting tells the management about the best use of the existing resources and where the new resources should be allocated to reap the best results.

Eliminates the chances of resources getting wasted

When all the costs are well stated and well estimated, the chances or probability of resource wastage is less ad this makes cost accounting very useful.

Enables the manager to estimate the future project cost

Also, when the current cost and expenses are estimated, it becomes quite easy to estimate the cost of future upcoming projects as well.

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