Cost and management accounting is a form of accounting that provides business managers with data and reports used to develop and implement business strategies to generate profits for the business.
There are many facets to cost and management accounting. Here are a few elements to it that would form a front line understanding of its application in business.
- Fixed costs – These are expenses and costs that remain unchanged and are mostly recurring. They are not dependent on the volume or production costs of the organization. Such examples include rental payments, some salary payments, costs of machinery or land, licenses.
- Variable costs – These are costs that are dependant on the level of output of an organization. Variable costs could either rise or decrease. Examples are costs of raw materials, bills payments.
- Semi-fixed costs. – These are made up of elements of fixed costs and variable costs. once a certain production level is exceeded, the cost will start to increase, having been triggered by the variable cost element.
- Semi-variable costs – These are made up of elements of fixed costs and variable costs. Semi-fixed costs are mostly used to project financial performance at different scales of production. Examples are repairs and maintenance costs, vehicle costs.
- Direct costs – These are costs an organization can refer or match to a function, cost object, project or department. Examples are this refers to costs incurred or accountable to a particular cost object, services delivered, a project, department, or product. They are the expenses incurred by the business to make a product or provide a service.
- Indirect costs – These are costs typically referred to as overhead costs and are related to the management and operational costs of the organization. They are costs not directly matched to the production or service. Examples are administrative expenses, bills payments, salaries.
- Cost budgeting – This is a tool to estimate the costs or efforts for projects or activities in project management. Cost budgeting includes the estimation of costs, setting a fixed budget, and managing and controlling the actual costs.
- Contribution margin – This is revenue minus variable costs. The contribution margin shows how much additional revenue is generated by making each additional unit product after the company has reached the breakeven point.
- Value-chain analysis – This is the process a business takes to evaluate each of the activities in its value chain to understand where opportunities for improvement lie. A value chain analysis lends insights to how each step adds or subtracts value from a final product or service.
- Cost drivers’ analysis – This is the analysis to determine the direct cause of a business expense. Cost drivers are an essential part of keeping a company’s finances in order and determining future profits. Cost drivers’ analysis helps businesses ensure their cost of production does not exceed their earned revenue.
- Activity-based costing – This is used to calculate the amount of both direct and indirect costs a business has per product. Activity-based costing allows companies determine the true cost of their products by distributing the costs of resources required for the business activity to take place.
- Strategic cost management – These are the techniques used to minimize a business’ overall expense to stay profitable and competitive.
- Strategic position analysis – This analysis reflects a company’s strengths and weaknesses in the market it operates in. It creates a benchmark on the company’s competitiveness and lends insights to the value creation opportunities for differentiation. The final analysis would reveal increase in price or lower costs for the company.
- Standard costing – This is the practice of estimating expenses in the production process. Manufacturers use this analysis to budget future costs and expenses, such as labour, materials, production, and overheads. Standard costing helps with accurate budgeting, inventory costing, product pricing and production benchmarking.
- Marginal cost – This is the increase or decrease in the total cost of production due to changes in the quantity of output. Managers use marginal cost to control manufacturing costs, plan budgets, make resource allocations, etc.