Measuring Costs

Cost accounting serves two broad purposes: measuring profit and furnishing relevant information to managers. The phrase actual cost depends entirely on the particular methods used to measure cost. The total cost of products or goods sold is the first and usually largest expense deducted from sales revenue in measuring profit.

Many manufacturing costs can not be directly matched with particular products; these are called indirect costs. To calculate the full cost of each product manufactured, accountants devise methods for allocating indirect production costs to specific products. The phrase actual cost depends entirely on the particular methods used to measure cost.

Accountants need to determine many other costs, in addition to product costs, such as the costs of the departments and other organizational units of the business; the cost of the retirement plan for the company's employees; the cost of marketing and advertising; the cost of restructuring the business or the cost of a major recall of products sold by the company, should that ever become necessary.

Many manufacturing costs can not be directly matched with particular products; these are called indirect costs. To calculate the full cost of each product manufactured, accountants devise methods for allocating indirect production costs to specific products.

Measuring profits or net income is the most important thing accountants do. The second most important task is measuring costs. Costs are extremely important to running a business and managing them effectively can make a substantial difference in a company's bottom line.