COST ACCOUNTING SYSTEM DEVELOPMENT PROPOSAL - Essay Example

Proposal for the Development of a Cost Accounting System 0 Introduction: A management control system is a means of gathering and using informationto aid and coordinate the process of making planning and control decisions throughout the organizations and to guide the behaviour of its managers and employees. The management control system gathers and reports information for management control at various levels like Total organizational level, Customer/Market level, Individual facility level and individual activity level.

In order to facilitate the collection of such data and information, the management control system should be backed by an efficient costing system. It is also essential that the costs are collected on the basis of activities of the organization properly classified into relevant cost drivers. 2.0 Costing Systems and Performance Measures:In order that the costing system is effective so as to support the management control systems, a consideration of various financial and non-financial performance measures is undertaken to introduce the costing systems.

This so because the functions of the management control systems is not only to collect the information but also to act upon an analysis of such data and information to steer the organization towards success. Hence arises the need for these performance measures. Some organizations present financial and non-financial performance measures for their subunits in a single report called the Balanced Scorecard. Different organizations stress different elements in their scorecards, but most scorecards include Profitability measuresCustomer satisfaction measuresInternal measures of efficiency, quality and time and Innovation measures.3.0 Development of Costing Systems:Considering the incorporation of the financial and non-financial measures in the management control systems, an Activity Based Costing system (ABC) would be appropriate for the new online company as well as the existing merchandising division of the company.

Activity based costing systems refine costing systems by focusing on individual activities as the fundamental cost objects. An activity is an event, task, or unit of work with a specified purpose; for example designing, setting up machines, distribution. ABC system calculate the costs of individual activities and assign costs to cost objects such as products and services on the basis of the activities undertaken to produce each product or service. The general approach to the ABC system in the merchandising and online activity is similar to any other manufacturing activity.

"Costs are divided into homogenous cost pools and classified as output-unit-level, batch level, product or service sustaining and facility sustaining costs. The cost pools correspond to key activities. Costs are allocated to products or customers using activity drivers or cost allocation bases that have a cause and effect relationship with the costs in the cost pool" (Horngren et al). However problems may be encountered in measuring activity-cost pools and identifying and measuring allocation.

The following example may illustrate the application of the ABC in the merchandising activity of the company:Activities: Ordering, Delivery, Stocking, Customer supportCost Allocation Base: Cost of placing each order, No of deliveries, cost of stocking and total items sold. A similar review of the online activity may be undertaken to identify the activities to which costs can be allocated and collected.4.0 Conclusion:Although ABC system will pose some bottlenecks in the allocation of costs to different cost drivers, it provides a meaningful base for the management decision for furthering the performance of the company in achieving the organisational goal of profit maximization.

Reference:Charles T. Horngren, George Foster, Srikant M. Datar (2002) Cost Accounting: A Managerial Emphasis Prentice Hall of India Private Limited Edition X pp 153