the cost accounting

 the cost accounting

The Importance and Applications of Cost Accounting in Modern Business Practices

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1. Introduction to Cost Accounting

Clearly, cost accounting has become vitally important not only as an instrument for cost determination but also for cost control. The pace of technological changes has made it increasingly difficult for the firm to trace costs and measure the contribution of costs of outputs or losses. Even when suitable costing methods are devised, a variety of problems arise in the classification of overheads. These and their effects on overall corporate income have become so complex that only a carefully tailored cost accounting system can provide meaningful profitability reports to a management faced with critical operating problems.

The success of any business depends on the accuracy of the costing techniques that are being used by the company. Proper costing is a prerequisite for the success of any business organization. Cost accounting is concerned with cost determination and control. Many accounting theorists in the past have emphasized the importance of “cost” in the management of an organization. However, accounting practices in many business organizations in the past decade fall short in the provision of what the management needs to have a full insight into the implications of cost of alternatives available to it. With the rise in the tempo of business operations made possible by science and technology, the problem of cost determination has undergone a great change.

2. Key Concepts and Principles of Cost Accounting

The Cost Accounting Sequence The provision of cost information essentially is a sequence of three events: 1. Accumulation: identification of costs and formation of cost centers, 2. Allocation: distribution of costs to cost centers, and 3. Application: employment of cost data for management accounting purposes. Accumulation assumes cost assignment to activities and processes while allocation deals with evaluating the necessary drivers. Application, in turn, occurs when cost data is employed to calculate unit product costs, enabling control decisions and maintenance activities to occur. Since gaining such an understanding permits numerous learning avenues to develop, the ability to apply such data in an intelligent manner is a key focus of this work.

Cost Accounting: Defined The phrase “cost accounting” is most commonly related to the determination and application of an organization’s product costs for use in corporate financial and management accounting functions. Several definitions of the concept are available in the literature. For the purposes of this text, we will define the discipline as follows: cost accounting is a management accounting measurement system developed to quantify an organization’s services, processes, and products. The result generated is an accumulation of all direct and indirect costs associated with the organization in question with proper regard for management purposes.

Key Concepts and Principles

3. Methods and Techniques in Cost Accounting

Methods and techniques in cost accounting cover activities including materials control, production maintenance, overtime scheduling, accounting for operating and capital expenditures, and project management. Cost accounting techniques also include estimation, budgeting, and relevant costing where several decision-making models have been developed. The focus, however, is on developing and implementing systems and procedures to monitor and control costs. The owner or management of an organization may ask accountants to concentrate mainly on decision-making, management, and control should cost accounting systems be installed within the firm. The techniques developed in cost accounting play a significant role in modern accounting objectives. The substantial money invested in plant and equipment, in employees in the performance of services, and in the purchasing of goods or investments, compel management to allocate work, incur substantial costs, and achieve efficient results.

Cost accounting follows the same formula as accounting and financial reporting, but applies the accounting principles and standards and develops special techniques to meet the needs of management. The methods and concepts used in cost accounting, as well as the techniques developed in the field to study various cost behaviors, help management in planning, control, and analysis of performance. Cost accounting primarily provides information to management and employees within the organization and does not restrict itself in its scope and magnitude, unlike the rules of financial accounting. Cost accounting also exists for external uses only, as in the circumstances when the tax laws require companies in certain industries to follow specific cost accounting guidelines.

4. Cost Accounting in Decision Making

Various techniques of cost accounting are constructed to furnish different kinds of information throughout the business cycle. These techniques of cost accounting suit one or more of the stages of manufacturing processes. However, the economic application of these techniques is to provide adequate information to help the management for its day-to-day planning, control, and decision-making functions. Such information is provided through forms of cost data of a period or of work in operation, consisting of the cost of objects of different cost centers. Two broadly defined techniques of cost accounting (Marginal costing and Standard costing) are designed to provide this type of information, and also other specialized branches of cost accounting help the managements in the same way. The main function of cost accounting is planning, controlling, minimizing, and decision making. Cost accounting is a formal method of accounting functionally oriented entirely to the requirements of cost control, decision-making, and cost.

5. Advanced Topics and Future Trends in Cost Accounting

Most world-class companies are no longer using only traditional accounting systems. They realize that a solid accounting system is critical to their success in the race toward becoming world-class companies. A major component of such an accounting system is cost accounting. What is cost accounting? What is its role in today’s manufacturing environment? What are the roles of cost accountants in modern firms and the organizations they work for? What are possible future directions for cost accounting practices? These are a few of the questions faced by the accounting discipline in the post-industrial revolution 1990s and beyond. These questions might shed light on topics we should cover when we teach our cost accounting courses and on areas where we should be doing more research.

This chapter focuses on advanced topics and future trends in cost accounting. In particular, the application of cost accounting in modern business operations and cost accounting’s positional function in advanced business environments including total quality management, customer-driven manufacturing strategy, target cost management, and flexible manufacturing systems are reviewed. The development and use of nonfinancial accounting measures in the context of cost accounting are also discussed. The chapter ends by raising a few open issues and suggesting hypotheses related to the new directions of cost accounting research.

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