Question

explain the value of understanding why inventory balances, inventory turnover, cost of goods sold, operating margin and working capital are important metrics for cost accounting.

Answer 1

All the work of cost accounting involved in the inventory valuation and cost incurred for production and maintaining margins for the organization.

Here value of understanding the inventory balances , inventory turnovers. Cost of goods sold and operating margin and working capital in cost accounting

1. Inventory balances.

The inventory remained in the stock will be indicating that the nessecity of the order of the inventory all our finance resource will get blocked at inventory if the inventory is high in the organization and also we will incur inventory holding expenses so it leads to increase in cost so the cost accounting gives importance to inventory balances.

2. Inventory turnover.

All the amount is invested in the purchase of inventory and that investment is blocked till all the inventory sold and generate cashflow if it was so late the company has to borrow from bank and it cost payment of interest it leads to increase in cost. So cost accounting will give importance to the inventory turnover.

3. Cost of goods sold

This is the cost incurred to generate sales which includes the cost of raw materials and cost of production. So if the cost of goods sold is increased automatically the manufacturer margin get decreased so cost accounting give importance to cost of goods sold.

4. Operating margin.

This is the amount that was earned by the manufacturer in production proces and it is a type of lincome so coat accounting gives importance to operating income.

5. Working capital

This is the blood to the production process of organization. Without working capital no production will produce goods. So all the time the working capital should be available to management in emergency time they may borrow amount from banks for temporary purposes.

These are all the explanation about the terms and why they are important in the cost accounting.

I hope, all the above mentioned points and explanations are useful and helpful to you.

Thank you.