Cost and Management Accounting - Research Paper Example

Cost and Management Accounting This is the paper that attempts to look in to the various topics which are not reported in the financial ments and yet very powerful tools in managing the internal affairs and decision making. While, the financial accounting is managing the ‘historical costs’, management and cost accounting is seen as ‘forward looking ‘discipline. Introduction Cost accounting is one of important disciplines in accounting with the intended purpose of providing timely and accurate information to the managers for making more rational and prudent decisions. It not provides information on important   Management of business concerns expect form cost accountants, detailed cost information in respect of its operations to equip their executives with the relevant information required for planning, scheduling, controlling and decision making. (Russell, Patel, & Riddle, 2001). Managers therefore rely on cost accounting as an important source to get actual process costs, costs of various departments as well as the prepartion and monitoring of budgets. What is also signficiant to note that like financial accounting which follows various international as well as national accounting standards, cost accounting does not necessarily follow such rules thus giving more flexibility as well as choice to get critical insight into the actual costs incurred by the firm. This paper will therefore discuss why cost accounting is important, what are different methods adpated and how budgets are prepared. Importance of Cost Accounting Cost accounting is a unique and important discipline which allows managers to make more informed and rational decisions. Based on the information provided by cost accounting records, managers often understand the real cost drivers and therefore devise their strategies in order to reduce or control such costs. Some of the reasons as to why cost accounting can be imported are discussed and explored below: Cost of material usually constitutes a significant part of the total cost of the production. Therefore, it is necessary to control it as far as possible. Cost accounting can therefore provide control over the costing of materials. Similarly it can be helpful in labor costs. Labor costs can be controlled if the workers complete their work within the standard time limit. Reduction of labour overtime and idle time too helps to control the cost . Overheads consist of indirect expenses which are incurred in the factory, office and sales department; they are part of the production and sales cost. Such expenses may be controlled by keeping a strict check on them. (Jawahar-Lal, 2008). For measuring efficiency, Cost Accounting department can provide information about standards and actual performance of the concerned activity. Now-a-days detailed estimates in terms of quantities and amounts are drawn up before the start of each activity. This is done to ensure that a practical course of action can be chalked out and the actual performance corresponds with the estimated or budgeted performance. The preparation of the budget is the function of Costing Department. Cost accounts should provide information, which enables the management to fix a remunerative selling price for various items of products and services in different circumstances. Cost Accounting can also provide information, which may enable reduction of overhead, by utilising idle capacity during the off-season. Cost accounts may provide estimates of Production of various levels on the basis of which the management may be able to formulate its approach to expansion. Most of the decisions in a business undertaking involve correct statements of the likely effects on profits. Cost Accounting is of vital importance in this aspect. In fact without proper cost accounting, decision would be like taking a jump in the dark, such as when the production of a product is stopped. Cost Accounting Methods The methods of costing refer to the techniques and processes employed in the ascertainment of costs. Many methods have been designed to suit the needs of different industries. These methods can be summarised as follows: Job Costing: Under this method, costs are ascertained for each job separately. According to I.C.M.A London – “The method of job order applies where work is undertaken to be a job or work”. It is suitable for industries like car repairs, printing, foundries, painting and interior designing, where each job has its own specification. During job costing, mangers actually define the costs of materials and overheads for each job. There are potentially three different steps in job costing involving the determination of exact requirements of the customer and than calculating and determining the costs for materials and overheads. Once these steps are complete, costs are assigned to various jobs and actual costs are determined. It is also important to note managers also use the actual and standard costs to determine the cost of the job. Process costing: A product passes through various stages of production called ‘processes in some industries. Each process is different and well defined. The output of one process is used as a raw material for the next process. Costs are accumulated for each process. To arrive at the unit cost, the total cost of the process is divided by the number of units. Textile mills, chemical works, sugar mills and food products may be cited as examples of industries which use this method. Process costing therefore is a management approach which is utilized to calculate the costs of existing processes through which goods and services are actually designed and manufactured by the firms. Process costing therefore is a type of operational cost which provides accurate estimates of the various costs involved at each stage of the process. However, firms often use average per unit costs to various processes in order to use a simpler and standard approach to smooth out cost differences at various stages of production process. Activity Based Costing Activity based costing is an important and more logical method of assigning costs to different overheads. Under activity based costing, a firm actually assigns costs to the activities which are really cause of the overheads and then these activities are assigned to the different overheads thus giving it more realistic and logical outlook. Under this method of costing, the actual costs therefore are realistically assessed and calculated and manager can get better insight into actual costs which can subsequently help them to set profit margins. Operating Budget The operating budget proposal process serves as the primary planning and control tool for the linkage of mission-based programs and the financial resources necessary for their success. To ensure that resources are available to meet the programmatic priorities of the University, it is important that all revenues and expenses be budgeted (planned) in a comprehensive manner. (Kinney & Raiborn, 2008) The submission of the budget proposal worksheets and any subsequent revision is the individual departmental budget manager’s responsibility. At the beginning of each semester, the Controller’s Office provides budget training for new budget managers. Budget managers who have attended in the past, and who wish to attend as a refresher, is also welcome to do so. Elements of a Budget Budget is comprised of different parts and various costs and overheads are budgeted in order to make a comprehensive and coherent budget. Some of the important elements of budget are: Direct costs can be easily identified with a particular project, (e.g., salaries for the faculty and staff who conduct the research or the cost of equipment and supplies used in the research), and must be considered reasonable, allocable and allowable to be incorporated into a proposal budget. F&A costs, also known, as overhead or facilities and administrative charges, are those incurred for common or joint objectives. F&A cost elements include items such as building depreciation, library expenses, space, utilities, payroll, and accounting and other sponsored research support services, and student services. Because the individual elements that make up the F&A cost rate cannot be easily identified with specific projects, F&A cost rates are negotiated with the federal government and then applied to projects as a percentage of the direct costs. Budget Preparation There are various types of budgets which a firm prepares according to its own requirements. It is however, critical to note that the different budgets are prepared by using different information therefore each budget is prepared in different manner by taking into consideration the different type of data and information. Sales budget: This involves a realistic sales forecast to be made to project the sales for future period. This is prepared in units of each product and also in sales value. Managers usually take into account the Sales force opinions as well as conduct market research and utilized various statistical methods (correlation analysis and examination of trends) and mathematical models to prepare such budgets. In using these techniques managers also consider Company’s pricing policy, general economic and political conditions ,changes in the population, competition, consumers income and tastes, advertising and other sales promotion techniques, after sales service and credit terms offered. Production budget: A production budget is usually prepared once managers finalize their sales budget because the actual sales targets serve as the guiding principles for how much production resources will be required to achieve the sales targets. A production budget is usually expressed in quantitative terms only and is geared to the sales budget. Production units are also expressed in terms of no of units produced. Managers first decide the sales targets and then add back the ending inventory that firms want to carry. Once this figure is arrived, opening inventory is deducted to arrive at the production targets. The production managers duties normally include analysis of plant utilisation and work-in-progress budgets. However if requirements exceed capacity, firms may go for Subcontracting or plan for overtime. As such production budget therefore not only outlines as to what overheads will be consumed but it also budget work hours as well as machine break downs etc. Variance Analysis A variance is the difference between an actual result and an expected result. The process by which the total difference between standard and actual results is analysed is known as variance analysis. When actual results are better than the expected results, we have a favourable variance (F). If, on the other hand, actual results are worse than expected results, we have an adverse (A). (Jain, 2000) There are very few plans that turn out exactly as planned. Even when the overall objectives of the plan are achieved, some, if not all components of the performance will have varied from the sub-plans or standards that make up the overall picture. For example, a football team may win an important game, as planned, but within the team performance there may be many aspects that the manager will analyse during and after the match so that performance can be improved for next time. As in business, good points need to be encouraged, less positive aspects need to be discussed and corrected. In a game of football, a side may have won a high number of corner kicks, but conceded too many free-kicks in defending. There is little to be gained for the next match if we do not think about the last performance in detail. Variance analysis provides a framework for business managers to breakdown the overall performance of an organisation, so that each individual element of the business can be isolated and analysed in turn. Conclusion: We have discussed some of the important aspects and the topics in cost and management accounting. The key feature of these topics is that they are very useful in taking some of the strategic decisions as far as management is concerned and on the other hand, they are equally helpful in executing the plans and monitor if they are going well or not. The budgeting process is the heart and soul of any company. It is this single process by which the companies integrate their various departments, take the estimates, discuss the same, implement them and then control them if there are unwanted deviations. These techniques and methods are accepted by GAAP and is also reported publicly but these methods go a long way as far as overall efficiency and effectiveness is concerned. Bibliography 1. Horngren. (2006). Cost Accounting. New York: Pearson Education. 2. Jain, K. &. (2000). Cost Accounting. New York: McGraw Hill. 3. Jawahar-Lal. (2008). Cost Accounting. New York: McGraw-Hill. 4. Kinney, M. R., & Raiborn, C. A. (2008). Cost Accounting: Foundations and Evolutions. London: Cengage Learning. 5. Russell, D., Patel, A., & Riddle, G. J. (2001). Cost accounting:an essential guide. New York: Financial Times Prentice Hall. Read More