prime cost accounting

prime cost accounting

The Significance and Implementation of Prime Cost Accounting in Modern Businesses

1. Introduction to Prime Cost Accounting

The prime cost accounting system provides a necessary information processing system that contributes substantially to the management functions that require reliable input. To many students of accounting and vital business functions, prime cost is a strangely floating concept, as though it is clear and well defined and has uniform significance and application. In these cases, the prime cost accounting system becomes either a mystery created by analysts or an irrelevant set of all amounts that have no relationship to anything managers actually do. This misconception often is the result of instruction and presentation that fixate upon details at the expense of understanding, presenting the design of cost concepts and burdening the students with calculations that were irrelevant to any application to managerial accounting even before the days of the computer.

Accounting, being a language of business, facilitates communication between government and business, government and government, and business and business. It is a means of identifying, measuring, and communicating economic information to permit informed judgments and decisions. As it is a key to the door for getting an all-embracing understanding about our practical business world, accounting has become a widely offered subject in lecture rooms and has established itself well in business communities. It is the motivation of this course and the learning that stem from it that drive businesses to find accounting systems that will keep track of and report financial information which relate to the operational components.

2. Key Components of Prime Cost Accounting

All products follow a custom distribution between basic product costs during the production process. The quantity of products will allow us to distribute the basic product costs. Information about the quantity and cost allocation and the centralized information about the main models can help us to impact the composition of production costs forming product costs by using the strategic controlling function and the company’s operational management. In this case, we approach to cost accounting development which is called prime cost accounting. We believe that prime cost accounting should be used at the strategic management level starting with the development of a company structural unit (that can be considered an accounting unit and is accountable for activities). Information about products and processes is passed on by this manager to the next unit. Each company structural unit is responsible for their unique types of operations or specialties. This prevents the large array of low value-added activities many companies have now for the sake of incomplete management consideration of product costs.

In our opinion, prime cost accounting should be an important part of the management accounting system to provide data about the formation of product cost and the influence of its basic elements. Prime cost accounting is a part of direct expenses accounting. Prime cost planning should be carried out through the strategic management level in establishing production enterprises development direction. Cost and prime cost accounting principles are the same: general information refers to the last and simultaneous planning/informing. Information about a measured amount of each enterprise production process must be evaluated at the end of this process. Profitability ability also includes information about products received.

3. Benefits and Challenges of Implementing Prime Cost Accounting

The significance of prime cost accounting benefits. The main aim of prime cost accounting is to accurately measure production costs, to assist in the assessment and management of quality and financial risks in a cost-effective manner, and to assist in the formulation of appropriate pricing strategies. If businesses are unable to accurately trace the costs of their activities, they risk making an inferior product or offering an inferior service if costs are overestimated. This could present an opportunity for their competitors if they were able to produce a similar product or service for a lower cost, and convert the opportunity into a profit if they priced their product or service at the maximum that the market would pay.

In spite of the advantages, many businesses appear to be reluctant to implement either some or total prime cost accounting in practice. Where there has been a qualitative review, it is highly anecdotal and does not provide a comprehensive account of the benefits and challenges of implementation in small businesses. Owing to the continual changes in the business environment such as currency fluctuations, inconsistent delivery of goods and services, and unreliable suppliers, as identified by Gillen, the significant volatile nature of costs could change after the offering of the product or service, and could potentially expose SMEs or any entity to financial ruin if relevant cost systems are not functioning to identify and measure cost categories or drivers that effectively react to cost movements.

Benefits and challenges of implementing prime cost accounting in the small and medium enterprise sector.

4. Case Studies and Real-World Applications

G. Edwards applied actuarial costing methods by obtaining actuarial costing reports to exhibit trends of future insurance premiums resulting from actuarial calculations for a property insurance company, which considered insurance coverage limits, and prime costs that keep pace with trends of shareholders’ equity in gross property risks, exclude costs of underwriting, inspection, finance, profits, and primary advertising, and provide an accounting system stability between insurance accounting data and financial statements. The scientometric methodology of the first study may be interesting for academic researchers specializing in whom, when, and where questions on the ACM subject matter or in general, as well as to professionals specializing in the research performance and tendencies in the public insurance sector.

The recommended practices and necessary attributes of prime cost accounting have been described and highlighted in academic literature in two preceding stages of this research. In this section, we present some of the most insightful and distinguished case studies and applications in modern accounting and economics businesses, with the first study synoptically tracing the historical and evolutionary appearance of prime cost accounting while the second case illustrates the close relation between the actual ACM need, in particular a significant prime cost element, and passage to the full installation of the method in the business.

5. Future Trends and Innovations in Prime Cost Accounting

We assume that changing directions of prime cost functions, its planning, and accounting in business can assure better efficiency in administrative activities. Each company goes alone teaching the seam. Analysis and planning of prime costs from new positions levels up the efficiency of the business in terms of customer satisfaction. The synthesis of marketing, production, and service spheres with the help of prime cost accounting provides the best quality of products and services on the market, which ensures the highest possible income for businesses. In this regard, prime cost reporting has been realized as cost and quality reporting with the best actual value of quality attributes per dollar, euro, etc. Businesses plan delivery prime costs in accordance with potential demand, thereby minimizing the frequency of internal and external rejections of goods and services.

To remain viable and competitive, businesses are constantly forced to hunt out new market opportunities, products, and services. This often leads to the search for new methods in management accounting that provide better strategic and tactical business planning. In this regard, using the concept of prime cost accounting methodology and cost characteristics may provide a new look on the system of cost accounting of a business entity. Following the new economics and marketing trends in production and cost accounting, prime cost functions change accordingly, and some components of prime costs can be considered as obsolete. Prime cost accounting in many countries is largely based on Ford’s ideas from over a hundred years ago, which were relevant then, and it seems like it’s time to reconsider these ideas significant for the present.