Three Reasons Cost Accounting is Important for Manufacturers

Do you understand the intricate costing of each product you manufacture? Manufacturers know that accurate accounting records help them make good business decisions, but oftentimes, they consider their business as a whole, rather than a sum of the parts resulting from each product (or product line) produced. Evaluating profitability at this level can be enlightening; you may be able to assess the contribution margin (or revenue minus variable costs) of each product or how different products are absorbing the organization’s fixed costs, including building rent, depreciation, or certain salaries. Taking these steps can help you continue to improve the decisions you make for the business.

Three reasons cost accounting is important for manufacturers include:

1. Accurate cost accounting helps manufacturers set pricing policies. Knowing your costs is a crucial part of determining sales prices. Many manufacturers strive to maximize their profit, while selling their goods at a fair price to their customers. While industry benchmarks may be provided by competitors who sell similar products, understanding your business’s costs will help ensure you are pricing products in a way that supports your business’s longevity.
2. Accurate cost accounting helps manufacturers respond quickly to market changes. Market changes are forces that manufacturers cannot control but that can significantly impact their business. For instance, recent supply chain disruptions have forced businesses to consider alternative products or supply sources to meet demand. Manufacturers must understand the difference in cost between the original product’s components and substitute components to assess whether the option is viable.
   
   
3. Accurate cost accounting helps manufacturers determine the best options when you reach full capacity. Fortunately, demand for manufactured products has remained strong for many industries. However, this has caused capacity constraints for some companies. By analyzing contribution margins at capacity bottlenecks, businesses can determine the best product to produce to maximize profit. Alternatively, by understanding product costs (along with sales forecasts and other models), manufacturers can determine whether capacity expansion is a practical option for the business.

To discuss your cost accounting system, contact a member of HBK Manufacturing Solutions at 330-758-8613 or manufacturing@hbkcpa.com.