Term Paper on "Accounting When it Comes to the Success"

Term Paper 6 pages (1792 words) Sources: 3

[EXCERPT] . . . .

Accounting

When it comes to the success of any given firm, the relevance of cost accounting cannot be overstated. In basic terms, cost accounting arose out of the need for the management to have access to financial information that is more detailed than that which is supplied by ordinary financial statements. In this text, I define cost accounting and the role it plays in the enhancement of the smooth operation as well as success of any given business entity. Further, I highlight the various cost accounting methods and how they are used.

Cost Accounting: A Concise Definition

According to Drury (2007), "cost accounting is concerned with cost accumulation for inventory valuation to meet the requirements of external reporting and internal profit measurement." In the opinion of the author, the differences existing between management and cost accounting are often vague. With that in mind, some people use cost accounting to refer to decision-making aspects while others prefer to use management accounting in reference to the same. This is indeed one of the major reasons why the author points out that the two accounting branches are in most cases used interchangeably. However, it is important to note that despite being used synonymously, some differences (though subtle) do exist between management accounting and cost accounting. For instance, Siegel and Shim (2000), note that the definition of the two accounting branches given by NAA highlights "cost accumulation for inventory valuation and income determination" as the major function of cost accounting. On the other hand, the key emphasis of management accounting remains "the use of the cost data for planning, control, and decision-making purposes" (Siegel and Shim 2000). In the next section, I highlight in detail the key role cost accounting plays when it comes to the success of business enterprises.

Why is Cost Accounting so Vital?

In basic terms, the utilization of cost accounting principles is critical for the success of business enterprises. Indeed, in the words of Vanderbeck (2009), "the importance of cost accounting information to the successful operation of a business has long been recognized." The author however notes that such information has gained more relevance in recent times given the global economic environment. Generally, the information generated as a result of cost accounting enables managers of any given entity to come up with more informed decisions for planning and controlling purposes. In a nutshell, cost accounting comes in handy when it comes to cost management, cost reduction, analysis of the benefits accruing from a certain process or activity, determination of both the cost and price of items, budgeting and lastly, performance measurement. In regard to the determination of the price of items, it can be noted that cost accounts avail to management the information needed for purposes of fixing the selling price (remunerative) of a service, product or class of products.

More importantly, when it comes to the management of costs, cost accounting can be used to control both labor and material costs. Indeed, cost control in the opinion of Vanderbeck (2009), remains an "important objective of a cost accounting system." The need to efficiently manage these costs cannot be overstated given that the management has a responsibility to maximize the wealth of shareholders through cost reduction. Further, the stability of an entity can greatly be affected by the erratic management of costs. In most cases, the total cost of any given product usually has a significant portion of material costs. With that in mind, there exists a need to control such costs. However, to exercise such control, a number of approaches including but not limited to standardization and value analysis may be used. When it comes to labor costs control, the same can be achieved by reducing both idle time and labor turnover. Still on cost control, it is important to note that cost accounting can help in checking overhead costs (i.e. expenses considered indirect) so as to ensure they do not spiral out of control.

Next, regarding performance measurement, the information made available by cost accounting can shed some light on an activity's actual performance vs. planned performance (standard). Such information comes in handy in the measurement of efficiency. When the actual performance deviates from the standard, the organization can institute corrective measures in a timely manner. This is important so as to enhance the viability (and hence success) of the firm going forward. Cost accounting also provides useful information for the purposes of budgeting. Indeed, it is the cost department that is in most cases charged with budget preparation.

It can be noted that given the complexity of modern organizations, planning and control of costs are viewed as being some of the major functions of cost accounting today. The failure by management to engage in income and expenditure planning exposes an organization to a high level of uncertainty. Cost accounting eliminates such uncertainty. In addition, cost accounting helps in the exposure of management defects by facilitating or easing the comparison of planned and actual outcomes.

In general terms, the effective management of any firm has a bearing on the success of the said entity. However, it is impossible for top executives to manage the firm effectively without the relevant information in relation to its various activities. Cost accounting avails such information to the management especially when it comes to the entity's costs. With such cost information, managers can easily devise effective cost control measures. As Vanderbeck (2009) notes, for the top executives of a firm to effectively control the prevailing operations and develop future plans, they must have access to cost information that is rather detailed. Cost accounting avails such information to the management. This information is also used to enable the effective allocation of resources by ensuring that the same go to the business' most profitable and efficient areas (Vanderbeck, 2009).

However, it should be noted that apart from what I highlight above in an attempt to highlight the role cost accounting plays in the success of a firm, cost accounting is also instrumental in the provision of production estimates at various levels. Such information can be utilized by management as well as the top leadership of the firm to determine the approach to be adopted for purposes of expansion.

Cost Accounting Methods and how they are Used

According to Needles, Powers and Crosson (2010), "both manufacturers and service businesses can use standard costing in conjunction with job order costing, process costing, or activity-based costing system." I will in the next section concern myself with three of the most common approaches to cost accounting. These include job order costing, ABC method and standard costing.

Activity-Based Costing

This method according to Brammertz et al. (2009) seeks to enhance the cost information's reliability. As the author notes, standard cost accounting methods have a major weakness. This weakness has got to do with the way overhead assignments are assigned. The assignment of such costs in this case is seen to be largely arbitrary. It is however important to note that of all costing methods, ABC comes across as being the most logical as far as the assignment of manufacturing overhead to items/products is concerned. To begin with, this method first ensures that costs are assigned to those activities regarded or seen as the overhead's real cause. Next, those products deemed to be demanding the activities in actual terms are assigned the cost of the activities. In the opinion of Brammertz et al. (2009), the main focus of this method remains the control as well as monitoring of overhead costs. However, it is important to note that this method is accused of "being based on time allocation estimates provided by employees, since they have an incentive to overestimate the time required for each task" (Brammertz, 2009).

Job Order Costing

According to Needles, Powers and Crosson (2010), when it comes to this method, "costs are traced to jobs." However, it is important to note that this method should only be utilized when tracing costs to a given job is considered relatively easy. Further, the method is mainly applicable in those instances where the manufactured items significantly differ. For this reason, each product in this case should be assigned some sort of a job cost record. In most cases, the summarization of a particular job's costs is done on what is referred to as a job cost sheet. Every job in this case should ideally have a dedicated sheet that is easily identifiable using a particular number or name. In the opinion of Needles, Powers and Crosson (2010), this method is in most cases utilized by firms making products considered special-order or unique. Examples of items in this category according to the author include but are not limited to suits that are custom-tailored, cabinets that are built in a rather unique way etc.

Standard Costing

Standard costing according to Brammertz (2009) "is based on the principle that fixed costs are allocated and added as an overhead charge to the variable cost of a specific cost object." In the author's opinion, an… READ MORE

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