Measuring Costs

Measuring CostsMeasuring profits or net income is the mostimportant thing accountants do. The second mostimportant task is measuring costs. Costs areextremely important to running a business andmanaging them effectively can make a substantialdifference in a company's bottom line.Any business that sells products needs to know itsproduct costs and depending on what is beingmanufactured and/or sold, it can get complicated.Every step in the production process has to betracked carefully from start to finish. Many

manufacturing costs cannot be directly matchedwith particular products; these are calledindirect costs. To calculate the full cost of eachproduct manufactured, accountants devise methodsfor allocating indirect production costs tospecific products. Generally accepted accountingprinciples (GAAP) provide few guidelines formeasuring product cost.Accountants need to determine many other costs,in addition to product costs, such as the costsof the departments and other organizational unitsof the business; the cost of the retirement planfor the company's employees; the cost ofmarketing and advertising; the cost ofrestructuring the business or the cost of a majorrecall of products sold by the company, shouldthat ever become necessary.Cost accounting serves two broad purposes:measuring profit and furnishing relevantinformation to managers. What makes it confusing

is that there's no one set method for measuringand reporting costs, although accuracy isparamount. Cost accounting can fall anywhere ona continuum between conservative or expansive.The phrase actual cost depends entirely on theparticular methods used to measure cost. Thesecan often be as subjective and nebulous as somesystems for judging sports. Again accuracy isextremely important. The total cost of goods orproducts sold is the first and usually largestexpense deducted from sales revenue in measuringprofit.