Measuring Costs in a Business

Next to measuring a business’s profit or net income, measuring costs is considered to be the second most important thing that accountants should do. Determining costs is ultimately important in effectively running and managing a business in order for the business to achieve a significant bottom line difference.

Whether a business is selling a product or specializing in a particular service, it must be able to determine how much necessary cost it is going to incur in order to avoid complications or making wrong decisions. Every step in the production process must also be carefully observed from start to finish. After all, there is no room for a business to incur unnecessary costs throughout its course. Costs that cannot be matched directly with a particular product are known as indirect costs.

Accountants prepare methods in allocating indirect production costs in determining the full cost of a specific manufactured product. Apart from product costs, accountants also need to determine many other possible and necessary costs that a business may incur such as marketing and advertising costs; retirement plan costs for the business’s employees; costs of the different departments as well as other organizational units of the business; the cost of restructuring the business and the cost of a major recall of the services, products or product lines that are sold by the business. Generally accepted accounting principles or GAAP give a few guidelines in measuring the cost of the product.

Accountants generally do cost accounting to measure the business’s profit or net income as well as supply significant information to business managers. Usually, the total cost of goods sold is the first and largest expense subtracted from sales revenue in measuring profit or net income. Cost accounting is an accounting procedure that helps determine the cost per unit of a product so that the inventory and cost of goods sold is valued. Cost accounting is also used to know the unit costs of service business-processed items such as the cost of a bank to process a deposit or check. Cost accounting may be performed either in a conservative or liberal approach. Actual cost varies entirely on the particular methods that are applied in measuring cost, which may usually yield subjective results.

One thing that is confusing, though, is that although accuracy is a topmost consideration in measuring and reporting costs, there is still no standard set method for these two processes. With this in mind, accountants must be very careful in measuring cost or profit in order to achieve the highest level of accuracy.