cost accounting systems

cost accounting systems

The Evolution and Importance of Cost Accounting Systems in Modern Business Operations

1. Introduction to Cost Accounting Systems

The majority of companies apply activity-based costing as part of the modern cost accounting system and it is related to an increase in market share, growth in productivity, reduction of loss, and improved strategies of competition. Activity-based costing must be understood so that a suitable mix of cost accounting methods is applied. With information provided for both internal and external use, the company may make pertinent strategic decisions, such as launching a new product, increasing or dropping production, and others. It is easily noticed that cost accounting ensures the precision of costs that are being charged for products and services. Thus, there are three groups of recognized costs in cost accounting: actual cost, standard costs, and budgeted costs. Along with other types of costs recognized, cost classification should be presented for specific management personnel to gain effectiveness in cost control. The primary role of accounting is to present and manage relevant and faithful information to internal and external users, and it should be considered how adequately the role of cost accounting is essential in today’s business environment. It is concluded that cost accounting has become increasingly important to the modern business environment.

Cost accounting is a key area of accounting that provides crucial information related to the cost behavior of products and services to ensure every organization operates efficiently and effectively. The main aim of the study was to understand the evolution and importance of cost accounting systems in modern business operations. It is vital to note that the evolution and ever-changing modern business growth requirements are what have transformed the function of accountants, thus continually making accounting an interesting career for many. This was a review study using secondary data from various articles, journals, books, and websites. The findings and conclusions of the study show that the ability of the organization to meet its objectives in both efficiency and effectiveness is directly related to its capacity to know and manage the costs. Essentially, cost accounting ensures every organization is able to determine and control the cost of every activity and resource that does not create value.

2. Key Components of Cost Accounting Systems

The laws of probability assert that in nearly all situations, only 2 percent of a problem is attributable to temporal factors, while 98 percent can be related to spatial aspects. Few decisions are guided by temporal information or are time-driven. Consequently, cost accounting report budget content reveals a vertical approach to sustaining the goals of cost effectiveness, achieving exceptional levels of quality by producing first-time product services, and routinely providing accelerated responses (lead-time reduction). These report sheets facilitate process activity identification and exhibit causal trigger points for further disciplined work such as historical spending profiles, requests for activity data for the current year, and corroboration of the calendar matrix. With the character of the dynamic cost accounting environment coming into sharper focus, the differences between the standard or conventional cost accounting report sheet and the modified version can now be explored. It is from this perspective that cost accounting systems often stake their pertinent mission, which is to reveal the process of transformation in a prescribed, disciplined manner simply by comparing the cost of using resources (efficiency—internal focus) with the value of using the resources (effectiveness—external focus).

In order to effectively manage the costs of any organization, several key components must be examined to determine what it costs to produce goods and services delivered to customers—both internal and external. As with any successful initiative, a clear business strategy, grounded in the dimensions of quality, cost effectiveness, and responsiveness, will guide the development, utilization, and improvement of the cost accounting process the organization creates. Cost management encompasses the set of tools, methods, processes, institutions, and culture a company puts in place to manage its costs. Companies have responded to increasing competitive pressure over the past ten years by training their attention on the most significant tools within the cost management spectrum: continuous improvement methods, activity-based management techniques, strategic cost management, financial-based systems, and overhead cost control systems. These techniques explore both the temporal and spatial characteristics of resource deployments. Furthermore, through activity analysis, resource consumption benefits, costs, and output flow relationships are documented. By using cost accounting, we can easily modify report content to the level desired by the users.

3. Types of Cost Accounting Systems

Process Costing System: Process Costing Systems are most often used in industries that produce homogeneous products. Homogeneous products are essentially identical units or batches of production from a continuous manufacturing process. Such industries often have a number of work centers that can produce various types of intermediate products. The objective of process costing is to accumulate and assign costs to products moving through the production process. In a process-costing environment, one can assume that raw materials are first entered into the earliest process. Once raw materials are entered into this first process, physical production begins on company products. Each subsequent work center will further touch raw materials while incurring labor and overhead costs until the products are completed.

Job Costing System: Job Costing Systems are most often used in industries that produce unique, distinct, or specialized products. In job costing, each job or production order has its own distinguishing characteristics. Labor and overhead costs are accumulated and allocated to each individual job. At the time that costs are combined with each job, the exact quantity of items and unit cost are recorded. The job costing system is generally used by service industries.

Before choosing a particular accounting system, a company themselves must decide how they want to approach their costs. It is extremely important that a company establishes a cost accounting system that will gather the information necessary for their specific situation. The proper cost accounting system can help greatly in solving problems that result from unforeseen changes in their particular business, product lines, and/or operational structure. Furthermore, a company’s cost accounting system is a major part of their input into the decision-making process. Management utilizes the cost accounting information to make strategic decisions such as what product lines to produce, shop floor control decisions such as what products to produce based upon the job order, as well as how to price company products. Traditionally, there have been several methods or types of cost accounting systems. The most common types are:

4. Implementation and Benefits of Cost Accounting Systems

Cost accounting enables managers to measure, analyze, and improve operations, product quality, and the company’s income with the necessary breakthroughs in fee pricing and margin improvement, rationalization in product lines, and business performance. Many tools and techniques that use cost accounting have been developed to support continuous improvement, lean, and operations management, such as activity-based costing, throughput accounting, and target costing which are well received by practitioners in different industries. Cost accounting helps organizations set innovative measures that can guide organizations’ choices, especially in times of crisis, facilitating an improvement in resource consumption with increased social equity. Therefore, we can conclude that cost accounting is a dynamic system and is of crucial importance in managing an entity’s resources and is certainly a valuable information tool.

To implement a cost accounting system, a business will go through six phases: planning, detailed analysis of structures and processes, system design development, system implementation, operations, and ongoing system improvement. Due to its purposes of controlling and improving efficiency and effectiveness, cost accounting provides various benefits and can be used in different types of organizations in all sectors. Businesses using cost accounting can see cost savings, risk reduction, enhance strategic decision-making processes, and improve production and operation levels. In service providers, it helps identify and assign the resources incurred and develop effective accountability for cost controls. And, in governmental organizations, it can also help control cost and bring efficiency to the public sector.

5. Challenges and Future Trends in Cost Accounting Systems

The “I condemn” list of this part did not have the goal to imply that the traditional cost accounting systems do not work. They were developed over a long period and they remained important and necessary tools for certain applications. The main point must question the fact that, generally, managerial systems in financial functions are not prepared for these new paradigms and directions that the present-day companies adopt. The traditional cost accounting systems are very robust for some practical applications, mainly to value process inventories, to value goods traded, to check costs for contractual fulfillment and tax development returns. Really, the gap between the systems required for the development of the available financial planning, budgets, rigor in supervising them, platforms of control and performance measures are satisfactory to measure the present-day companies. There is a reflection on the company and the current processes, reaching a complex chain of responsibilities on the organization of these processes to manage and develop their financial and productive systems.

The traditional cost accounting systems have created a lot of criticisms and new approaches and new paradigms such as management accounting, activity-based costing, just-in-time systems, and quality tools have emerged. These new tools attempted to develop procedures to alleviate the problems and modeling assumptions described by Kaplan and Johnson and Kaplan, and that stood for four objections about the traditional cost accounting systems. The objections alleged that the traditional cost system was unable to measure correctly the actual cost of individual products and services, was dominated by overhead costs and suffered significant modification whenever there were changes in production volume or its complexity, did not attend the capacity of the costs to influence the profits of the companies and the administrators’ decisions, and showed a peculiar opinion about recovery of costs.