Cost Accounting Principles and Techniques, Budgetary Systems - Essay Example

Introduction

The information system which gives both financial and non-financial data concerning the resource acquisition and use costs of an organization forms a prolonged and predictable core sector of every business. This report is about cost accounting techniques and principles that are important in decision making and budgets and budgetary systems. Cost accounting refers to costs classification and expenditure evaluation to allow the total cost a specific production unit to be determined with a realistic point of correctness and at the same time to show the way the total cost is calculated. It entails classification, recording the correct expenditure allocation for products or services costs determination and for the organization of well-arranged information to allow management control and guidance (Boyd, 2013). A budget, on the other hand, is a computed action plan for the upcoming accounting period. Therefore, a budget can be for a short-term or long-term period depending on the financial objectives of the organization. Managers use information on cost accounting to make decisions linked to the formation of policies, research development, and production planning, pricing, and budgeting, among others. The report is divided into two parts. The first part discusses cost accounting techniques and principles used in decision-making in Togul Car Manufacturing Industry. The second part is about budgeting and budgetary systems as used in the financial department in Heritage Bank.

Principles and Techniques

Cost accounting gives the company management the information needed for effective management of the business. It is different from financial accounting since it concentrates on costs, on attaching them to activities that create cost and reduction of cost. The car manufacturing industry can depend on cost accounting principles to study the operation of business and where the revenue is spent, other than making balance sheets for assets and liabilities. Furthermore, the company management can monitor its expenditure and develop ways of improving its profit margin by adopting various cost accounting techniques in making decisions. One of the principles that will allow Togul management to make rational decisions is through identification of all the costs under which it operates. The management will be required to come up with all the costs regardless of the way they are incurred or who generates them (Markgraf, 2017). Such costs include costs of raw material, production costs, labor costs, costs of repair, transport costs, among other costs. By doing so, the company will be in a position of creating a budget that can guide its operations and control the amount they spend and resource allocation in sectors that have greatest effect. Another important principle is exposing what generates cost. The principle allows the management to identify the origin of the individual cost items for every category and whether the cost is needed. For instance, Togul Company management may evaluate direct labor, under which they may retrieve cost item of painting car bodies and they may decide if the cost is reasonable or whether the purchase of pre-painted piece may be more cost-effective.

Moreover, there is the principle of unnecessary costs elimination. There is need to break down the cost of specific items and categorizing them to give room for analysis of costs that do not give any benefits (Markgraf, 2017). Togul Company management group may decide to eliminate fixed or direct costs which do not lead to effective company management. For example, the company may decide to do away with stores found in other places if there are no returns from their expenses. Furthermore, the company may decide to cut down car features that are costly but do not add any value to the customers. Additional cost savings is the last principle that is deemed important to Togul Company when it comes to decision making. Cost accounting can give additional savings when the cost of a specific item is compared with the company's standards or historical data. For instance, if it costs the company to ship raw materials for car manufacturing more as compared to other companies in the same field, then the management will be required to reconsider the way of transportation. If the cost of manufacturing a new brand is more as compared to the previous brands of the same features, the manufacturer needs to find out the reason for that and the possible ways of minimizing the costs.

One of the cost accounting techniques that Togul Company management may opt for in decision making is marginal costing. It is a technique that allows consideration of only variable costs during the computation of product cost. It is the cost of the last unit produced (UCa and Kasa, n.d). It is the techniques for cost data presentation in which variable and fixed costs are exhibited separately for managerial decision making. It is important for the analysis of cost information for management guidance that tries to generate an effect on profit resulting from changes in output volume (Garisson, Noreen, Brewer, and McGowan, 2010). Another technique is just-in-time. Business enterprises have come up with the idea of creating attention to minimize levels of stock to a minimum through the creation of a closer relationship with suppliers and forming more regular distribution for small quantities. Just-in-time purchasing refers to buying goods so that delivery heads their use (Drury, 2006). It allows the supplier and the company to work closely, with the company guaranteed for a lot of purchases. On the other hand, the suppliers guarantee for good material quality at reasonable prices when they are required. Through the technique, Togul Company management will decide on the best supplier for their raw material having considered the pricing and the quality of the material. Furthermore, the company will enjoy cost reduction since they will not have to put much stock in their warehouse (Horngren, Harrison, and Oliver, 2012).

In decision making, Togul Company management may also rely on opportunity cost technique. According to Lal and Srivastava (2009), opportunity cost refers to the value of substitutes declined through adoption of a certain strategy or applying resources in a particular way. It is the return got from an investment other than the current one. They are costs resulting from the use of labor or other facilities in a certain way that has been declined because of not applying the facility in the manner agreed before (Dury, 2013). Togul Company may have some facilities that are rented such as warehouse or stores. The company management may decide to buy it and transfer the ownership if they find that the rental cost will be expensive in the long run, hence cutting on its expenses. Activity Based Costing is another cost accounting technique and viewed as a refined cost system that allows classification of more costs as direct to disburse the number of indirect-cost pools and to recognize cost drivers (Heisinger, 2008). It will favor better allocation of costs through lesser cost pools called activities. According to Lal (2002), Activity Based Costing is a method to the final output costing through activities monitoring and locating consumption of resources of activities. It eliminates activities which do not add any value to customers and organizations and limits misrepresentations on products costs that might result from illogical allocation of outgoing costs (Horngren, Bhimina, Datar and Foster, 2002). Incorporation of Activity Based Costing will allow Togul Company to get rid of those activities that takes a bigger proportion of the company's expenses but having minimal returns.

Budgeting and Budgetary Systems

To ensure that the just hired newly qualified accountant understands budgeting in Heritage I would first brief her on what is budgeting. She will have to understand that a budget is a qualitative or financial statement which is prepared and approved before the period of which it is defined to attain a given objective (Siyanbola, 2013). In most cases, it may include expenditure, income or the employment of capital. Furthermore, she will need to understand that budgetary control is a system that utilizes budget to assist in the controlling and planning all aspect of heritage including production and sales of goods and services. The budgetary control system would enable her to prepare expenditure and revenue variance analysis which will assist her to realize areas of deviation which may help the managers to avoid any form of embarrassment because any form of adverse variance will result into failure by the management to meet the Heritage objective thus causing disagreement with the stakeholders.

The newly hired accountant will have to understand that budgeting would enable Heritage to improve planning and control which will result to an incensement of the profit and financial position. Furthermore, budgeting will enable the management to focus on a given operation and financial problems and to transform the objectives of Heritage into action. Also through budgeting, the management will be in a position to coordinate various production factors to satisfy the needs of all stakeholders and to communicate the objective of the organization across the company (Tsamenyi, Bennett and Black, 2004).

Additionally, the newly hired accountant must understand the type of budgets that exists within Heritage. The short-term budget is usually used for a short period of time which is usually one year; Long-term budget typically take a minimum duration of five years; Fixed budget always does not fluctuations the changing activity cost or revenue; (Hope and Fraser, 2003) Flexible budget is designed to change the changing level of activity; Rolling budget always involves a continuous update of budget after reviewing the actual result for a given period; Active based budget is usually dependent on utilizing cost driver data in various feedback processes; and Incremental budget uses the estimated income and expenditure for the current year as a means of determining the budget of the year (Lynn, and Madison, 2004).

The newly hired accountant must know that budget can be used as a tool of controlling by comparing the actual with the budget performance. Some of the objectives of budgetary control that she must understand is that it must combine the idea of all the management level during the preparation of the budget and ensure that it coordinates various activities within the Heritage. In addition, she must understand that an effective budgetary control system must support and involve the top management and have an accurate organization structure with a responsibility that is clearly defined. Furthermore, the budgetary control system must have a suitable information and accounting system and should entail a regular revision of targets and budgets when the need arises. An effective budgetary control system must have a clear-cut data of long-term corporate objectives within which the budgeting system is to operate, have an honest and full involvement of the line managers in all the budgeting process aspects and must be administered an a way that is flexible (Siyanbola, 2013).

Conclusion

Cost accounting and budgeting have proved important in financial management within organizations. Most decision making especial financial ones are aided by some of the cost accounting principles and techniques. For successful decision making, Togul Car Manufacturing Company can rely on principles like operation costs identification, exposure of costs generations, costs elimination and additional cost saving. Techniques that the company can adopt are marginal costing, just-in-time, opportunity cost, and Activity Based Costing. Budgeting and budgetary systems have also proved significant in the management of departments. Budgetary control will be important in controlling and planning all aspects of Heritage such as production and sales of goods and services. A newly employed accountant will need to understand budgeting, types of budget and its importance in the finance department.