Cost Accounting in Manufacturing – Seven Great Objectives for Bottom-Line Profits

Odd as it may seem, as a financial concept the term bottom-line has only been around for about forty years or so. It’s genesis as a word (an adjective, really) was the result of the growing need to establish the ultimate benchmark for profitability in the post-World War II advanced corporate economy. That is to say, to find out more than a company’s profit and loss through simple financial accounting. With the complexities introduced through a more mechanized, large scale, robotic global economy in the 1950’s and 1960’s, as well as mandates from stockholders for more stringent (i.e., realistic) profits reporting during this time, a new way of assessing profit was born. It was called, cost accounting.

This technique for manufacturers differs from financial accounting insofar as it is largely a much more formal mechanism by which costs of products or services are determined and controlled for efficiencies. This is achieved by the gathering of all operational costs, then classifying them systematically to ascertain their appropriateness as expenditures. With this information, management is able to make decisions that remove inefficiencies in production cost and, therefore, enhance the bottom-line profits. Good cost accounting can not only aid in controlling costs, but can also help in a wide array of manufacturing operations. In this sense, the seven great objectives of cost accounting in manufacturing are:

1. Determining Costs: Of course, the overall objective of cost accounting is find out what your products and/or jobs cost you to make or provide.
2. Control: Improving efficiency by controlling and reducing costs. To control the budget through classification and analysis is to control the costs.
3. Information: Knowing raw material stock levels, the work in progress, and the amount of finished goods is information provided through cost accounting that can be used immediately by management.
4. Increasing Efficiencies: The efficiency of any operation is only truly measured by the sum of its parts. As chaos shows, inefficiency in one area must eventually cause inefficiency in others. Cost accounting brings an understanding of the level of efficiency (or inefficiency) in all areas of manufacturing operations.
5. Determine the Selling Price: Through the detailed information provided by good cost accounting, you can find out an optimum selling price for your product and/or service under differing variables (seasonal, economic, distribution, etc.).
6. Operations Management: Where are your direct and in-direct costs being eaten up and why? With cost accounting, you can tweak operations policies to enhance the profitability of the work produced.
7. Financials: Cost accounting provides the opportunity for frequent production cost reviews, especially as they correlate with production output in relative terms. Again, routine cost accounting financials help realize the continuous improvement that reduces costs.

A glance over these seven objectives quickly tells you that, as opposed to simple financial accounting, the detail work of cost accounting provides a richer information base for operations management. The collection, classification, and determination of cost through accounting becomes, then, a means by which efficiencies are discovered and implemented. To the extent that these implementations offer a greater return on investment, and perhaps a greater dividend to shareholders, this technique can be said to truly help build the bottom-line profit.