managerial cost accounting

managerial cost accounting

The Importance and Applications of Managerial Cost Accounting in Modern Business

1. Introduction to Managerial Cost Accounting

With plans for building a developed substantial part of the governance of planned and successfully using the selected strategic management tools in the hands of modern business today, managerial cost accounting remains one of the main supports for management. On the other hand, the problem of efficiency governed by managerial cost accounting and design for planning type cost centers is even more inspiring due to the high degree of strong interaction between workflows, incurred technological progress, and socioeconomic conditions of development. This observed reality is determined by the characteristics of methodological and applicative changes taking place further, which implies an increased degree of ultra-fast real-time reporting, development and successful use of a single or based predictive and simultaneously diagnostic models, and correct interpretation of the information or results obtained from the reports.

Owing to the special economic, technological, and social significance of modern cost accounting, the authors review the implemented component elements of management accounting. Management accounting is an improved stage in the historical evolution of cost accounting, through which the management of a company ensures the fulfillment of planned strategic target indicators. It provides more economically viable methods of governance, types, and influence over financial finances and other resources. The paper examines the applications of just-in-time and predictive models for designing cost centers. In conclusion, the authors outline upcoming trends in the evolution of cost accounting in the context of the provisions of scientific and technical progress and socioeconomic modern development.

2. Key Concepts and Principles of Managerial Cost Accounting

The establishment of centers of responsibility throughout the organization effectively reflects management’s commitment to the utilization of managerial cost accounting in the operational control and short-run decision-making responsibilities of business. These centers of responsibility can be evaluated on the basis of their costs and the costs of other subordinate centers of responsibility that contribute to their operation. Such cost minimization, cost-effectiveness emphasis can provide the consequences of center output short reports of special interest to management and should focus attention on the underlying cost accounting system utilized. The utilization of managerial cost accounting concepts and principles can clearly supplement the control aspects of the traditional financial accounting reports. A successful understanding of managerial cost accounting systems provides management with information concerning the short-run profitability of existing products, territories, customers, and manufacturing processes, on which to base current decisions and future plans.

Like cost accounting, managerial cost accounting has its own definitions, key concepts, and principles. That management has difficulty in controlling causal relationships among sales, costs, and profits necessitates a distinctively defined and conceived managerial cost accounting. Managerial cost accounting focuses both on the reduction of controllable costs, costs that can be directly attributed to specific individuals or organizational units, and the utilization of existing and proposed cost systems in the operational control and short-run decision-making responsibilities of business.

3. Tools and Techniques Used in Managerial Cost Accounting

Break-even analysis may be defined as the determination of that point at which total revenue from the sale of a product exactly equals the total costs of making and selling the product. In other words, break-even analysis is a method used to help management identify the level of output that can be produced without the firm incurring an actual loss. The break-even point is, in essence, the point at which sales equal expenses. Growth and profitability are thereafter realized for all sales beyond the break-even point.

Budgeting is a device for meeting the dual and simultaneous objectives of controlling a particular level of costs and accomplishing an effective plan. It enables management to compare planned results with actual results with a view toward taking action relative to the obligations and assignments made in the plans. Budgeting, being a prerequisite to institutional control, is not separate from the provision of overall management control. Costs are planned and agreed upon in objectives and assignments made in the plans.

The important tools and techniques for cost data used in managerial cost accounting include budgeting, break-even analysis, standard costs, and variance analysis. A brief summary of each tool follows.

4. Integration of Managerial Cost Accounting with Decision-Making Processes

How does the cost accounting system relate to the decision-making process? It must gather and process the costs used by company managers. If the cost accounting system fails to use or communicate the use of relevant cost information in making decisions, it operates at some divergence from the decision process and is either irrelevant or shortsighted. Such shortcomings would cause the cost accounting information system to fail to fulfill its potential role of providing the necessary information for successful business management. The design of the cost accounting system should minimize the “differences” between the costs accumulated by the cost system and the costs affecting the decision. The cost accounting system needs to take the information flow generated by the mechanics of the operations of the firm and convert it into economic decisions that assist management in achieving long-run profitability – that is economic wealth – for the firm.

Although managerial cost accounting systems should be designed to meet the specific needs of a business, certain design characteristics are common to most businesses. A well-run firm has integrated cost accounting in the sense that costs measured and accumulated account for a very substantial proportion of the costs associated with producing, selling, and delivering products. When the firm uses these accounting data for decision-making purposes, these decisions should address total costs rather than only the cost of a narrowly defined compartment of the business. The decision-making process that affects costs usually requires that many elements – engineering, production, marketing, manufacturing, materials handling, finance, taxes, labor relations, etc. – make an input. In nearly all business cases, costs are complex interdependent relationships of the various components that make up the business. To the extent that these decision elements affect costs, the decisions should be related to those costs.

5. Emerging Trends and Technologies in Managerial Cost Accounting

One of the major evidences of the increased importance of cost and managerial management in greater use of new physical and information technology in general, and the more effective implementation of effective management accounting systems in particular, concerns the increased use of activity-based costing. The focus of that approach is more relevant for the emerging conditions that are forthcoming as it deals with the design and implementation of effective cost accounting systems for complex manufacturing and service organizations.

In the past few decades, both the responsibilities and expectations of managerial accountants have undergone significant changes and increased tremendously. This change has been fueled by both the increasing capabilities of information technology and the dramatic changes that have occurred in general deductive performing the product development, production, distribution, marketing, and service activities of such organizations as a whole. A brief overview of several specific components of the techniques of cost and managerial accounting is given below. All of these are available today to augment decision-making efforts of individuals who are interested in cost measurement and control.