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Why is Cost Accounting So Important to the Success of the Firm - Research Paper Example

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Why is Cost Accounting So Important to the Success of the Firm

Cost accounting is very important because it provides relevant information that can be used by the managerial staff to make decisions. The information provided by cost accounting is mainly used internally by corporations. The purpose of this paper is to describe the importance of cost accounting for a firm. Cost accounting provides relevant information that can be used by both managers and financial accountants. It can be used to measure and report financial and non-financial information that relates to the cost of acquiring or consuming resources by an organization (Horngren & Foster & Datar, 2000). Accountants can be flexible in their applications of cost accounting due to the fact that cost accounting does not have to comply with the generally accepted accounting principles (GAAP). Accountants also use cost accounting to describe the future activities of an organization. The information compiled by cost accounting can be useful both in the short and long term. The planning function of an organization benefits a lot from cost accounting. Another important benefit of cost accounting is that it allows companies to compute the cost of a product. There are different techniques and methods in cost accounting that are used by companies to make better decisions. Cost accounting can help a company establish the correct pricing for its products. A technique that can be used to set the price of a product is mark-up pricing. Mark-up pricing sets a price taking into consideration the cost of a product. For instance if the company determines that mark-up price is 50% and the cost of a product is $100, then the price of the product is $150. Another method in cost accounting that can be very valuable to make operating decisions is cost-volume-profit relationships (CVP). CVP analysis is one of the most powerful tools managers have at their command (Garrison & Noreen, 2003). The use of CVP analysis helps managers understand the relationship between cost, volume and profit. One of the most popular and useful CVP applications is breakeven analysis. The breakeven analysis is an analysis to determine the point at which revenues received equals the costs associated with receiving the revenue (Investopedia, 2011). The net profit of a company at the breakeven point is exactly cero. The formula to calculate break even in units sold is fixed expenses divided by unit contribution margin. The use of break-even analysis can be used to determine the viability of a new project. A very important cost accounting method that is used by accountants and managers in all industries is budgeting. Budgeting is a planning function that displays in quantitative form a proposed plan of action by management for a future period of time and is an aid to the coordination and implementation of the plan (Horngren, et al., 2000). The preparation of budgeted financial statements is referred too as pro forma statements. Three advantages of the use of budgets are planning, creation of performance criteria, and promotion of coordination and communication. The most comprehensive budget prepared by organizations is the master budget. The master budget is composed of a series of interrelated budgets. Some of the subcomponents of the master budget are: Revenue budget Production budget Direct materials budget Ending inventory budget Manufacturing overhead budget R&D costs budget Marketing budget Distribution costs budget Customer service costs budget Administrative costs budget Capital budget Cash budget A technique that is used to evaluate the results of a budget or pro forma financial statemen ...Show more

Summary

Accounting is one of the basic business functions of an organization. Accountants are responsible for keeping track of the economic activity of the business. The two most important branches of accounting are financial and cost accounting. …
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