Important to know how cost behave

Explain your review why it is important to know how cost behaves?

Cost accounting is basically used to calculate the per unit cost of product so if the people in the management doesn't know the per unit product price so they will unable to set a suitable selling price of the products and determine the profit per unit which they earn.

Normally mangers usually rely on cost accounting to provide an distinctive idea of the actual cost of processes, operations, departments or product which is the foundation of their budgets, allowing the managers to analyze the fluctuation and the way funds are used socially for profits. Cost accounting is most widely used in management accounting, where the managers able to justify the ability to cut costs for a company in order to increase the profitability of the company. As a tool for internal use, versus a tool for external users like financial accounting, cost accounting does not need to follow the GAAP standard which is the (Generally Accepted Accounting Principles).

Cost accounting creates a financial value out of the production of specific products, measuring currency that is nominal into units that are measured by convention. Cost accounting allocates the company's fixed costs over a period of time to what items are actually produced during that period of time, this creates a total cost of product production. Products that were not sold during the time period produced a full cost of those products, recording them in a complex inventory system that uses accounting methods of its own that is in applicable with the GAAP standards. Managers are able to focus on each period's results as it is related to the standard cost of any product.

Any mishap in cost that were caused by calculating what the overhead of a product is versus what a unit cost is for the companies that specialize in only one specific product are very minor in the industries that are mass producing the product with relatively low fixed cost. By understanding why costs vary compared to what was actually planned helps the manager to save the company money by taking proper actions that are appropriate to correct that variation in the future. Variance analysis is a very important part of the cost accounting because it breaks down each variance into many different components of actual cost and standard cost. Some of these components are material cost variation, labor cost variation and volume variation.

In Conclusion, cost accounting is a very important part of the management accounting process. In order for the managers to determine the best possible methods to increase the company rate of profitability, as well as saving the company money in the future, cost accounting is a necessary system in the management of a company budget, by providing important data to analyze the fluctuation in a company production costs.

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