What Are The Uses Of Cost Data?
The collection, presentation, and analysis should serve the following essential uses of cost data:
- Planning profit by means of budgets
- Controlling costs via responsibility accounting
- Measuring annual or periodic profit, including inventory costing
- Assisting in establishing selling prices and a pricing policy
- Furnishing relevant cost data for analytical processes for decision making
1. Planning Profit by Means of Budgets.
The planning phase deals with the future years of the company. Cost accounting provides or budgets the contemplated materials costs, wages and salaries, and other costs of producing and marketing the products. Management is concerned with the ultimate profit arising from these costs and planned revenues or sales. Budgeting is the forecast of the effects on profits of varying volumes of activity. Budgeted materials costs and quantities and labor costs and predetermined quantities of time required to manufacture each product are basic for these cost elements.
These costs plus all factory overhead and non manufacturing costs that fluctuate with activity must be determined first in order to establish the profit base for budgeted sales. Some operating costs vary directly in relationship to volume ; other costs and expense items are either wholly or partially fixed in character. The final budget should represent a conservative operating forecast. If the contemplated volume seems attainable and management decides to operate on such a cost-volume-profit relationship, it becomes imperative for all levels of management to strive to control their costs accordingly.
2. Controlling Costs via Responsibility Accounting.
Uses of Cost Data To control costs, these fundamentals should be observed:
(a) fixing responsibility for control,
(b) limiting the individual’s control effort to his controllable costs, and
(c) reporting the performance of the individual.
Fixing responsibility for the control of costs requires the establishment of definite fines of authority. The organization chart presents the organizational structure and, following these lines of authority, allows the assignment of cost control responsibility to specific individuals. These individuals should also have had a hand in determining the planned or budgeted costs under their control- Not only costs but also sales revenue and profits are made the responsibility of certain executives. Cost and revenue responsibility becomes profit responsibility.
Another Uses of Cost Data is Limiting the individual’s control effort to his controllable costs is a necessary aspect of responsibility accounting. Any report should specifically identify the manager’s controllable costs. Of course, each cost should be someone’s responsibility. This responsibility phase often becomes lost in a maze of cost classifications. The reporting and measuring phase has already been touched upon. It is important that each individual’s budget be considered as an integral part of the overall company budget.
The greater each supervisor’s effort and success in controlling the costs for which he is responsible, the greater the chance for the entire company to reach the planned profit goal. The control of costs requires a basis for comparison. Budgeted costs constitute one basic foundation for comparison; standards or predetermined costs and expenses provide the cornerstone for cost control procedures.
A comparison of actual or experienced costs and expenses with these standards reveals an out-of-line performance. These exceptions form the basis for an investigation into the reasons, resulting hopefully in remedy and correction.