A Guide to the Significance of Cost Accounting for Businesses
All entrepreneurs start their businesses to make a profit. However, knowing how much your business spends is critical to determine whether you are making a profit or not. This is where cost accounting becomes significant to businesses. It enables you to know where your business is spending, how much it is earning and where it loses money.
Accounting firms in Dubai can help you with the nitty-gritty of cost accounting and its relevance to your business. In this blog, we will give you key insights into cost accounting and its significance to businesses in Dubai. Read ahead to know further:
What is Cost Accounting?
Cost accounting is a type of managerial accounting that focuses on a company’s cost structure. Cost accounting captures a company’s total cost of production by assessing the variable costs of each step of production as well as fixed costs, such as a lease expense. Cost accounting assigns costs to products, services, projects and related activities.
Through cost accounting, entrepreneurs can gather critical insights that can lead to better budgeting, increased efficiency and higher profit. Cost accounting is mainly used internally by managers and employees to improve the profitability and efficiency of a business.
The Key Elements of Cost Accounting
Cost accounting is composed of three principal elements such as materials, labour and overhead. We will discuss these items individually as stated below:
1. Direct and Indirect Materials
Materials, a key element of cost accounting, are divided into direct and indirect materials. Direct materials are directly integrated into a finished product. Cotton in clothing and wood in furniture are examples of direct materials. Materials like glue, gloves and tape cant are tied to a specific product and they constitute indirect materials.
2. Direct Labour
In cost accounting, labour refers to wages given to employees related to a particular aspect of creating products or delivering services. Wages may include salaries, hourly rates, overtime, bonuses and employee benefits.
Overheads cover the costs that are related to ongoing business expenses but cannot be directly attributed to creating products or services. Office staff, utilities, the maintenance and repair of equipment, supplies, payroll taxes, depreciation of machinery, rent and mortgage payments and sales staff are some examples of overhead costs.
Types of Cost Accounting
There are various types of cost accounting, each of them having its focus and approach to analysing production costs. The following provides an explanation for each type of cost accounting:
Standard Cost Accounting
Standard cost accounting assigns the standard cost to labour, materials and overhead rather than the actual costs. Standard costs are the costs based on the efficient use of labour and materials under standard operating conditions. The actual costs will be compared to the estimated costs once the production is completed.
Activity-based Cost Accounting
Activity-based Cost accounting (ABC) identifies the overhead costs and assigns them to goods or services. This gives you a deeper understanding of what the products and services cost. Compared to standard cost accounting, ABC focuses more on the cost of manufacturing a product or providing a service. ABC accounting will enable you to understand the activities that increase production costs.
Marginal Cost Accounting
Marginal costing or cost-volume-profit analysis is useful for making short-term decisions. It reveals the incremental cost that comes with producing additional units of products and services. Marginal cost accounting helps you to identify where production is maximized and costs are minimized. Businesses use this type of analysis to gain insight into potentially profitable new products, sales prices to establish for existing products, and the impact of marketing campaigns.
Lean accounting can be considered an extension of lean manufacturing and production. Lean accounting is designed to optimise and improve financial management practices within an organization. Lean accounting is an extension of the philosophy of, which has the stated intention of minimizing waste while optimizing productivity. It helps businesses to eliminate unnecessary transactions and systems, reducing time, costs and waste.
Life Cycle Accounting
Life cycle accounting analyses the cost of making a product from start to finish. It will enable you to understand how much you will spend on the product during its useful life. Life cycle accounting comes in handy when you want to choose between two or more assets, understand the benefits of an asset and budget more accurately.
Cost Accounting V/s Financial Accounting
Unlike financial accounting, cost accounting is internally focused and firm-specific. It is commonly used by managers and employees of your organisation who are expected to make business decisions. Cost accounting can enhance operations and improve profitability. Financial accounting is intended to help shareholders, lenders, regulators and other parties who don’t have access to your internal information.
Connect with the Best Accounting Firms in Dubai
No matter your industry, cost accounting is essential for your team. If you don’t have the time or expertise to handle your accounting, outsource it to the best accounting firms in Dubai such as Jitendra Chartered Accountants (JCA). We are one of the top accounting companies in Dubai with more than 20 years of experience. JCA provides reliable accounting services in Dubai including Economic Substance Regulations (ESR), Ultimate Beneficial Ownership (UBO) and Anti-Money Laundering (AML).