Cost tracing allows conducting safe and accurate decisions with regard to the cost of business management. It is a process that matches the associated costs of the manufactured product (Taschner & Charifzadeh, 2020). There are various methods of applying production costs, such as variable and absorption costing. The two are differentiated in the treatment of fixed manufacturing overhead costs. The variable costing uses the fixed manufacturing overhead cost on the period when such expanse is incurred (Taschner & Charifzadeh, 2020). On the other hand, the absorption costing method calculates the expenses in the form of fixed manufacturing overhead after the product sales – cost is essentially traced (Taschner & Charifzadeh, 2020). However, the method of product tracing is inapplicable in certain cases due to the associated difficulties. For businesses, it is essential to determine their economic condition before starting the tracing and allocation of the product costs. The financial burdens associated with the procedure may outweigh the benefits of accurate cost determination. Thus, accountants who utilize the methods for cost tracing and allocation need to make essential decisions to determine the optimal amount of information for the allocation of individual costs. This decision may have a direct impact on the company’s profitability.
The benefits of effective cost tracing could be summarized in four separate points. It aids the managerial department in the evaluation of the expenses incurred by different cost centers. It simplifies the identification of incurred costs per production unit (Taschner & Charifzadeh, 2020). Consequently, the process of price determination could be conducted more effectively. The associated expenses of the company become easier to regulate, and the management could take corrective actions in a timely manner if irregularities within the incurred costs are identified. In summary, cost tracing is an essential tool within business management with various benefits. However, the process should be approached with financial burdens in mind as it might negatively affect the company.
Reference
Taschner, A., & Charifzadeh, M. (2020). Management and cost accounting: Tools and concepts in a Central European context. John Wiley & Sons.