Editing Cost accounting (section)

==Origins of cost accounting ==
All types of businesses, whether manufacturing, trading or producing services, require cost accounting to track their activities.<ref name="google1"/> Cost accounting has long been used to help managers understand the [[cost]]s of running a business. Modern cost accounting originated during the [[Industrial Revolution]] when the complexities of running large scale businesses led to the development of systems for recording and tracking costs to help business owners and managers make decisions. Various techniques used by cost accountants include standard costing and variance analysis, marginal costing and cost volume profit analysis, budgetary control, uniform costing, inter firm comparison, etc. Evaluation of cost accounting is mainly due to the limitations of financial accounting. Moreover, maintenance of cost records has been made compulsory in selected industries as notified by the government from time to time.<ref>Bhabatosh Banerjee, ''Cost accounting : theory and practice''</ref>  

In the early industrial age most of the costs incurred by a business were what modern accountants call "[[variable cost]]s" because they varied directly with the amount of production. 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.

Some costs tend to remain the same even during busy periods, unlike variable costs, which rise and fall with volume of work. Over time, these "[[fixed cost]]s" have become more important to managers. Examples of fixed costs include the depreciation of plant and equipment, and the cost of departments such as maintenance, tooling, production control, purchasing, quality control, storage and handling, plant supervision and engineering.<ref>Performance management, Paper f5. Kaplan Publishing UK. Pg 3</ref>

In the early nineteenth century, these costs were of little importance to most businesses. 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|reason=Evidence of such a trend?|date=August 2023}}. Managers must understand fixed costs in order to make decisions about products and pricing.

For example: A company produced railway coaches and had only one product. To make each coach, the company needed to purchase $60 of raw materials and components and pay 6 labourers $40 each. Therefore, the total variable cost for each coach was $300. Knowing that making a coach required spending $300, managers knew they could not sell below that price without losing money on each coach. Any price above $300 would make a contribution to the fixed costs of the company. If the fixed costs were, say, $1000 per month for rent, insurance and owner's salary, the company could therefore sell 5 coaches per month for a total of $3000 (priced at $600 each), or 10 coaches for a total of $4500 (priced at $450 each), and make a profit of $500 in each case.