[1] Often considered a subset of managerial accounting, its end goal is to advise the management on how to optimize business practices and processes based on cost efficiency and capability.
All types of businesses, whether manufacturing, trading or producing services, require cost accounting to track their activities.
Money was spent on labour, raw materials, the power to run a factory, etc., in direct proportion to production.
Managers could simply total the variable costs for a product and use this as a rough guide for decision-making processes.
However, with the growth of railroads, steel and large scale manufacturing, by the late nineteenth century these costs were often more important than the variable cost of a product, and allocating them to a broad range of products led to bad decision making[citation needed].
To make each coach, the company needed to purchase $60 of raw materials and components and pay 6 labourers $40 each.
For example, paper in books, wood in furniture, plastic in a water tank, and leather in shoes are direct materials.
Furthermore, these can be categorized into three different types of inventories that must be accounted for in different ways; raw materials, work-in-progress, and finished goods.
[citation needed] Overheads include: These categories are flexible, sometimes overlapping as different cost accounting principles are applied.
As business became more complex and began producing a greater variety of products, the use of cost accounting to make decisions to maximize profitability came into question.
Throughput accounting aims to make the best use of scarce resources (bottleneck) in a JIT (Just in time) environment.
[7] "Throughput", in this context, refers to the amount of money obtained from sales minus the cost of materials that have gone into making them.
For example, a job-based manufacturer may find that a high percentage of its workers are spending their time trying to figure out a hastily written customer order.
Via (ABC) Activity-based costing, the accountants now have a currency amount pegged to the activity of "Researching Customer Work Order Specifications".
EVA-PBC methodology plays an interesting role in bringing strategy back into financial performance measures.
Lean Accounting does not require the traditional management accounting methods like standard costing, activity-based costing, variance reporting, cost-plus pricing, complex transactional control systems, and untimely and confusing financial reports.
The cost-volume-profit analysis is the systematic examination of the relationship between selling prices, sales, production volumes, costs, expenses and profits.
Multiplying the contribution margin ratio (40%) by the change in sales volume ($80,000) indicates that operating income will increase $32,000 if additional orders are obtained.
To validate this analysis the table below shows the income statement of the company including additional orders: Variable costs as a percentage of sales are equal to 100% minus the contribution margin ratio.