To determine:

1. Profitability of firm or business unit
2. Profitability of a product
3. Cost of doing an activity
4. Cost of an operation/work performed

Cost Accounting is the system put in place by the accountants to obtain this data

• Is unique to each organization
• Can be made as detailed as desired
• Cannot obtain precise costs

Usually the decision with respect to detail is based on whether value of more detailed cost information is worth the administrative costs that have to be expended to obtain it.  This should be decided by management.

IMPORTANT

Costs are determined by the cost accounting system in place.

Engineers concerned with meeting target costs or improving efficiency, need to interface with the accountants who know the system and basis of how costs are determined.

Cost Accounting involves

• Accumulation
• Categorizing
• Allocation of support and indirect costs

Cost Systems Presently Employed

• Historical
• Standard
• Activity Based

These are adopted to serve firms producing

1. Job Order (individual products/services)
2. Process - (mass production)

Its Premise - An enterprise can be considered to represent a composite of diverse activities necessary to be done in order to produce its output.

You only want to perform activities that are necessary to produce the product the customer purchases and do these efficiently.

You want to eliminate any unnecessary (non value added) activities since this saves the firm money.

Expensive to develop and maintain but the truer costs, better understanding and control provided over that overhead cost which is now the largest cost component of a product or service, makes it worthwhile for many firms to adopt.

For Example:

Purchasing Department's cost to process order

If you can automate the $.80 overhead per order can be reduced.

1. Do Flow Chart to itemize all activities involved in the value chain
2. Use ABC to cost these activities
3. Separate activities into value added and non value added.  Eliminate non value added ones where possible
4. Identify high cost value added activities and see if they can be restructured to reduce cost
5. Another alternative is outsourcing.  Maybe cheaper to purchase activity than to do it
6. Make trade off projection to see whether profitability can be improved by spending more on some activities.
7. Investigate overhead and support activities that are not fully utilized to see whether there is over capacity.