Basic Cost Management Concepts
Basic Cost Management Concepts
Cost management is the process that involves planning and controlling the budget of a business. Cost management is a form of management accounting that enables a business to predict imminent expenditures to help decrease the chances of going over budget. Cost management is also known as ‘cost accounting’. Having a sound cost accounting structure in place aids a business in keeping its overall budget under control. This type of accounting provides detailed cost information that a business may require in order to control their current operations and devise plans for the future. There are a number of such management concepts used by organizations. Let’s take a look at some of them.
Standard Cost Accounting
The concept of standard cost accounting looks to apportion the organization’s fixed costs over a certain period of time to the products manufactured during that time and the result of this is considered as the total production cost. This allows the full cost of the unsold products during that period to be recorded in inventory using different accounting methods. Standard cost accounting enables managers to look at the results of each period considering the standard cost for a particular product instead of its fixed cost. Another important feature of this concept is a variance analysis. This analysis divides the variation between actual and standard costs into several categories to help understand the reason for difference between planned and actual cost.
Throughput accounting uses the Theory of Constraints to provide useful information to a business to help in making decisions that facilitate its profitability. This concept looks to transform the way the business evaluates its revenue recognition and profitability and therefore changes the figures used for decision making. Throughput accounting does not consider the rules of conventional accounting, particularly, the reliance on efficiencies.
Activity-based costing is a concept of cost management that allocates costs to products based on the activities that are needed by them. Activities refer to the regular actions that take place in a business, for example interaction with customers regarding invoice questions. This concept provides a truer picture of actual costs as it transforms, which the other forms of accounting may consider as indirect costs.
Lean accounting is a concept that refers to the alterations required to a company’s accounting, control, measurement and management processes in order to promote lean manufacturing methods and lean thinking. Unlike other cost management concepts, lean accounting looks to eliminate waste and reduce the amount of non-value work.
Effective management systems form the backbone of any business, big or small. Therefore, it is necessary to have these in place in order to ensure the smooth functioning of the business.
Carrol Rogers is an educational writer and an online tutor who writes on varied topics that includes economics, management accounting , statistics and philosophy.