How to know what it costs to create one Widget

Cost accounting is about calculating the total cost involved in the process of production.  In a nutshell: “What it costs to create one widget!”

Estimating the accurate cost of products is critical for profitable operations.  A business must know which products are profitable and which ones are not, and this can be ascertained only when it has estimated the correct cost of each product.

Key Objectives of Cost Accounting

1. Cost finding
2. Cost planning and controlling
3. Cost analysis for managerial decision

Six Advantages of Cost Accounting

1. Helps in cost control
2. Helps in decision making
3. Guides in price fixation
4. Helps in cost reduction
5. Finds out profitable and unprofitable operations
6. Finds out idle capacity

Cost accounting systems cannot be installed without proper financial accounting systems.

Talk to your accountant if you feel your business could benefit from having a cost accounting system.

How a cost accounting system improved efficiency and profit

Client

Ann Marie owns a manufacturing business which makes a high-end product. She varies her design from time to time so there are many versions of her primary design.

Problem

Ann Marie did not have a cost accounting system that would determine the cost of producing each version. So she did not know which ones were cost-effective to produce and earn her more profit and which ones were not.

Solution

She engaged her accountant to select an appropriate cloud-based cost accounting system to tailor to her needs.

The Accountant analysed the manufacturing process and determined the basic activities involved. The next step was to create a system which would:

1. Measure how often each basic step is performed in producing a design.
2. Determine the cost of each step in the manufacturing process.
3. Use 1 and 2 above to determine the cost of each design.

Ann Marie enthusiastically uses her new cost accounting system to:

• Measure profits derived from the sale of each design.
• Target low-profit designs for discontinuation.
• Help determine pricing of new designs.

Benefits for the Client

The system allowed Ann Marie to measure production efficiency and thereby grow her profit and business.