Measuring Costs


The most important thing accountants do is measure profit or net income. The second most important function is cost measurement. Costs are vital to running a business and managing them effectively can make a significant difference to a company’s bottom line.

Any business that sells products must know its cost of production and can be complicated based on what it produces and / or sells. Every step of the production process must be carefully traced from beginning to end. Most manufacturing costs do not directly match specific products; These are called indirect expenses. In order to calculate the total cost of each product, accountants devise methods for allocating indirect production costs to specific products. Generally Accepted Accounting Principles (GAAP) provides several guidelines for measuring production costs.

In addition to production costs, accountants must determine many other costs, such as the cost of departments and other corporate units of the business; Retirement plan costs for company employees; Marketing and advertising costs; The cost of restructuring the business or recalling the products sold by the company, if ever needed.

Cost accounting serves two broad objectives: measure profitability and provide relevant information to managers. What makes it confusing is that although accuracy is important, there is no single method for measuring and reporting costs. Cost accounting is conservative or comprehensive and can fall anywhere in the continuum. The phrase “actual cost” depends entirely on the specific methods used to measure costs. These can often be as subjective and obnoxious as some of the game judging systems. Again, accuracy is extremely important. The total cost of goods or products sold is the first and usually largest expense deduction from sales revenue.