Importance of Managers Cost Understanding Essay

Importance of Managers Cost Understanding - Essay Example Cost can be simply defined as an amount that has to be given up or to be paid in order to get something. It is therefore an expenditure that needs to be incurred. In business, cost usually comprises of monetary valuation of effort, time and utilities consumed, risks incurred, material, resources, and opportunity forgone in delivery and production of goods or services. All expenses may be costs, but not all of the costs (such as those which are incurred in getting an income generating asset) are expenses. (Business dictionary, 2011) Cost Analysis Cost analysis is the examination, accumulation and manipulation of cost information for healthy comparisons and projections. (Business dictionary, 2011) Cost Accounting Cost accounting forms budget and actual cost of processes, departments operations, or product and the analysis of profitability, variances, or social use of funds. It is a type of accounting process whose objective is to capture the company’s costs of production by estimating the costs of input at each step of production along with the fixed costs such as depreciation of capital equipment. At first it will measure and record such costs individually, then comparison between input and output or the actual results will be made to aid company management in measuring financial performance. (Investopedia , 2011) Cost Management It is the management of cost related activities results from collection, analysis, evaluation, and reporting of cost information used for estimating, forecasting, budgeting, and monitoring costs.( Business dictionary, 2011)... rtance of ‘Managers Cost Understanding’ Managers are making use of cost accounting for cost management to help form decisions that are profitable for the business. It is important that managers understand cost in order to cut cost and to improve profitability. Managers make use of cost accounting to calculate the unit cost of the product. This is helpful for managers for if the managers do not know the unit cost they will not be able to set the relevant selling price in order to break even or to realize profit. The calculation of profit per unit can also be known through the use of cost accounting. Cost understanding therefore is an essential management tool for effective management functions, this include performing budgetary planning & controls along with decision making. Managers depend on cost accounting to provide information of the actual cost processes, products, operations which is the foundation of the budget. This would help them analyze fluctuations and the ho w funds are to be use to cause profit. For managers this would help them provide a justification for cost cuts for a company in a manner that it increases profit. As a tool for internal usage versus tool for external users such financial accountants and such accounting does not make use of GAAP (Generally Accepted Accounting Principles). Management understanding of cost creates a financial value for a product, measure the expenditure into nominal amount of currency. The understanding works on the process of taking recorded historic costs and allocating it over a specific period of time over what outputs is produced. The actual output produce might differ from that of the predicted and this would affect the amount of cost that producer has to pass to the consumer. Hence, managers are able to focus on