Essay on "Role of Management and Cost Accounting Reporting"

Essay 6 pages (1643 words) Sources: 10

[EXCERPT] . . . .

Role of Management and Cost Accounting Reporting System

Management and cost accounting is a modern concept that is making its presence in the accounting and financial world. After the world war1 and during the periods of great depression, industrialists' became cost conscious because of the economic turmoil of those days. Furthermore, that was the era when industrialists faced higher competition from the new emerging industrial players and they were also forced to face the increasing governmental control over the economy. During the world war-2, many governments in different parts of the world imposed such strict legislation that made it compulsory for industrial companies to acquire new tools for management and cost accounting techniques to improve quality of the products, to trace the accurate cost for each production unit and to control the costs to avoid inflation. At initial stages, industrialists failed to achieve the basic objectives of their trials to accurately determine cost of production with the help of financial accounting and hence they faced an imperative necessity to improve and improvise new techniques of cost accounting (Polemni, 2008).

Cost accounting is a specialized branch of accounting that involves classifications, accumulation, assignment and control of costs. It can be defined as "the recording, classifying and appropriate allocation of expenditure for the determination of the cost of product or service, and for the presentation of suitably arranged data for the purpose of control and guidance of management" (Polemni, 2008). Cost accounting information system is considered as one of the most important information system for any business as it is considered as the key to management's assessment of the company's efforts to achieve predetermined profits or goals (Williams, 1985, p. 20). The predetermined objectives could be of varied nature such as, what would be the projected sales, probable expenses, total cost of the project, gross profit and net profit and what are the major ways to increase the business?

Cost accounting is a major part of management accounting that uses all of the available accounting information that can provide better grounds for making informed and attentive business decisions. Managerial cost accounting hence is the boon that serves the purpose of providing cost information to the managers so that they may take valuable decision to achieve the pre-determined goals. Managerial cost accounting involves various cost measurement tools such as activity-based costing, job costing and process costing (Geiger, 1995, p. 51).

Managerial cost accounting includes various different measuring techniques including job costing, activity-based costing and management, flexible budgets, direct cost variances and management controls, overhead cost variances and management control, inventory costing and capacity analysis, target costing and cost allocation, customer-profitability analysis and sales variance analysis, allocation of support department costs, common costs and revenues, cost allocation of joint products and by-products, process costing, just in time inventory management, simplified costing methods and transfer pricing by management control systems. One can say that managerial cost accounting is a situation-specific process that serves the sole cause of providing adequate and relevant information to the managers so that they may take appropriate timely decisions to achieve the pre-determined profits and goals (Geiger, 1995, p. 51).

Managerial cost accounting holds its importance in all forms of organizational activities including private sector industries and enterprises and public sector governmental offices or the whole government projects. In 1989, General Accounting Office of USA published a report which suggested that all the previous efforts to improve accountability and internal control failed and government remained unsuccessful to manage its projects, to protect its assets or to provide tax payers with effective economical services which they expect and deserve. "The report also gauged the public's perception that "the federal government is poorly managed, with little or no control over its activities." (Dale, 1995, p. 47) It was suggested that the reason was material deficiencies in management information and accounting system (Dale, 1995, p. 47)

Since the new economy is emerging as the platform for free market and enterprises are enjoying the effects of globalization, many companies takes part in joint ventures. These joint ventures act as a way to take part in international markets where the local expertise and political influence of the partner enterprise of the joint venture may prove to be profitable or where government regulations prohibits foreign enterprisers to take part in the market without a local partner (Alnoor, 2003, p. 56).

In such situations, when companies decide to involve with other local partners to install joint ventures, the managerial cost accounting reporting system gains further importance. When firms opt for vertical integration, operations may run in a centralized or decentralized fashion of using quasi-market mechanisms such as negotiated transfer prices. In such situation management control systems and transfer pricing processes ease out the possible tensions between the partners or joint ventures. In the cases of joint ventures, a common central authority, which represents both or all of the partners often oversees the interests of the individual firms and resolve the probable disputes that arises at lower levels of the organization (Williamsons, 1991, p. 272).

The importance of managerial cost accounting reporting system increases in cases of joint ventures as with proper management accounting reporting systems, management can clearly identify the various present and possible obstacles to the flow of financial improvement and betterment of services and products (Maskell, Baggaley, 2001, p. 27).

Thus, with better managerial cost accounting informative reporting systems, international ventures can improve to greater extent. The reporting system should identify the major obstacles to flow of work and should highlight their impact on time, cost and quality. This will help the managers to improve their decisions and to facilitate better management to achieve the pre-determined goals. Furthermore, if the managerial cost accounting reporting system clearly analysis the obstacles to flow, it will provide a greater ease to identify the causes of wastes and to analyze how to reduce waste of resources. While using traditional management accounting systems, the management deliberately hides the waste through standardizing the costs and budgets. The modern concepts of managerial cost accounting reporting system should provide a proper insight about the total and actual waste involved with the activity processing and proper implications about how to reduce the wastes involved (Maskell, Baggaley, 2001, p. 27).

Management accounting techniques can help in managing and regulating the changes required for the improvement of the company and to help in achieving the predetermined goals. As the managerial cost accounting reporting system provide proper information about the changing techniques and their effective results, process management initiatives, which varies from incremental improvements in existing process to radical business process innovations can be very well analyzed and regulated (George, 2006, p. 26).

Many management accounting experts suggest that management accounting needs to move from cost to value creation. The accounting management should start delivering ideas to improve business insights (Maskell, Baggaley, 2001, p. 28). A managerial cost accountant must be able to anticipate and innovate to create new values through innovative products, services and processes. As the only criteria to stand in long run in the market competition is to keep providing increasingly high levels of value to the consumers in the marketplace, it is very necessary for the management and cost accounting reporting system to provide enough support for the managers to provide pre-decided progressive goals for the future achievements in value production and services (Maskell, Baggaley, 2001, p. 28). An optimal management information system is one that provides all the needed information which is cost and benefits justifiable can be presented in a form that will prove to be vital for managerial working and decision making patterns and which can be accessible anytime when it is required (Williams, 1985, p. 20).

Some of the other accounting specialists suggest that management accounting should emphasize more on time and less on the traditional cost measures of management… READ MORE

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