Cost accounting basics is all about learning how to use different accounting methods to determine the cost of producing your product and then how to use that information to make a profit.
That is why cost accounting is often referred to as cost management accounting.
As a small business owner your number one goal is to make a profit.
You do this by keeping a close eye on the expense of producing your product and adjusting your selling price to keep an acceptable level of profitability.
Basic cost accounting is a very important part of maintaining a healthy profitable small business.
To better understand cost accounting basics, I will use a very simple cost accounting example using the fictional bakery I used in figuring a break-even-point.
Our costs include:
We estimate we can make and sell 90 cakes a week or 360 in a month.
We are using a basic cost accounting method that uses both fixed and variable costs to determine our unit cost.
Quick accounting definitions refresher:
Our unit cost is:
So the actual cost to produce a single cake is $17.77.
Now to analyze these costs and determine how we can increase our profit...let’s organize our costs. We do this by putting them into three cost accounting basic categories:
Now we will organize our bakery unit costs:
Analyzing these three categories, we decide we cannot for the time being change or improve the burden and labor cost, but we have shopped around and found a wholesale store where we can purchase bigger quantities and different brands of our ingredients and cut our direct material cost down to $7.50 per cake. This will affect our break-even-point and our profitability in a positive way.
We could also use this cost accounting basic method to see if hiring an additional baker would be a wise decision assuming demand was there.
Next Section: Lesson 9