The Importance of Tracing Costs in a Business 

The Importance of Tracing Costs in a Business 

Cost tracking is important for a business that engages in monetary transactions. Managers rely on information attained from cost-benefit analysis to make internal managerial decisions (Cokins & Căpuşneanu, 2010). Decisions that depend on cost-benefit analysis include pricing, the production technology used, and the product mix. An organization may undercharge or offer discounts if costs are not traced appropriately, leading to losses. Cost tracking also helps an organization avoid overcharging, which may scare potential customers. Besides, tracing cots helps a business control and monitor profitability and design strategies for future success (Lepadatu, 2011). If managers discover that a business is making underwhelming profits, there may be a need to cut overheads such as marketing costs and logistics to bolster revenue.

According to Brewer et al. (2022), there are two primary costing approaches: absorption and variable costing. Under variable costing, only costs that vary with output are considered product costs. That would include costs such as direct materials, direct labor, and the variable portion of manufacturing overheads. Manufacturing overhead and selling and administrative costs are considered period costs, which are subsequently reported as expenses in the income statement. Variable costing results in a low break-even price and a slightly higher gross profit, making it hard to determine the ideal price.

On the contrary, absorption costing attributes variable and fixed manufacturing costs to the product cost. That means the unit cost of a product includes direct materials, direct labor, and fixed and variable manufacturing overheads (Brewer et al., 2022). Selling and administrative costs are not considered product costs, just like in variable costing. This method is also referred to as the full cost method because it attributes variable and fixed costs to the costs of a product. Unlike variable costing, absorption costing provides a clear picture of the costs of a product, thus facilitating the determination of optimal prices (Brewer et al., 2022). Absorption costing is acceptable in external reporting because it gives a real view of costs.

References

Brewer, P. C., Garrison, R. H., & Noreen, E. W. (2022). Introduction to managerial accounting. Mcgraw-Hill Education.

Cokins, G., & Căpuşneanu, S. (2010). Cost drivers. Evolution and benefits. Theoretical and Applied Economics, 8(8), 7.

Lepadatu, G. (2011). The importance of the cost information in making decisions. Romanian Economic and Business Review, 6(1), 52.

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How important is it to trace costs appropriately? Explain.
As you are beginning to think about the importance of tracing costs appropriately, please consider the differences between variable costing and absorption costing.

What implications does each of these have on such things as financial reporting of profit and pricing your products for the marketplace?
You may also want to think about the issues involved with traceable costs as discussed in our text or in articles that you may find online.