Page 141 - Finance for Non-Financial Managers

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Finance for Non-Financial Managers
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Cost Accounting in Context
Don’t let the seeming complexity of this topic deter you—
it’s really common sense in principle.The concepts are not
really complicated; it’s just the application that can get a bit confusing if
you’re applying them to a many-faceted manufacturing operation. I sug-
gest that you apply the examples here to your own company, your
own employer, or your own department. I think you’ll find the exam-
ples make a lot more sense when you have a firsthand experience of
the nature of the business that’s incurring these kinds of costs.
difference. Underlying the whole idea of cost accounting is the
need of every business to protect and grow its gross profit,
while maintaining the quality of its product or service at accept-
able levels.
So this chapter will be devoted to explaining some of the
unique attributes of cost of sales and the efforts that go into
understanding and controlling them. You will notice as you read
this chapter that we’re talking primarily about manufacturing
companies, because those are businesses for which cost
accounting is most challenging, yet most valuable. If you’re
working in or running a distribution company, a retailer, or a
service business, some of the tools and terms we discuss here
may seem less important to you. Keep in mind that the princi-
ples are universal for every business enterprise.

The Purpose of Cost Accounting—Strictly for Insiders

Amazing as it may seem, many companies don’t really know
whether or not they’re making a gross profit on many of the
products they sell. It’s a simple matter for a company with even
the most fundamental bookkeeping to determine if it’s making a
gross profit over all of its product sales. But if a company
makes a number of products, each with different cost structures
and levels of complexity, the managers often don’t really know
how much each product contributes to—or subtracts from—the
overall gross profit.
Cost accounting is the classic example of what outside