Question

Identify and discuss the factors that are affecting the way cost accounting is practiced.

Answer 1

Cost accounting is a method of accounting in which all costs incurred in carrying out an activity are collected, classified, and recorded. This data is then summarized and analyzed to arrive at a selling price, or to determine where savings are possible.

Financial accounting considers money as the measure of economic performance whereas cost accounting considers money as the economic factor of production. Cost management identifies, collects, measures, classifies, and reports information that is useful to managers in costing, planning, controlling, and decision making.

The factors affecting how cost accouting is practiced are as follows:

• Global Competition: Recent advancements in communication and transport have transformed the world into a "Global Village", narrowing the geographical and cultural boundaries. This has led to a global market for many manufacturing and service firms. In this scenario, companies are competing with the best in the global market. The new competitive environment has increased the demand not only for more cost information, but also for more accurate information, timely and relevant accounting data. These are crucial in appropriately managing costs.
• Growth of the service industry: While traditional industries like handloom, handicrafts, coir, cashew, beedi, etc have declined in importance, the service sector like hospitality, tourism, tradesmanship, etc has gained importance in the economy. Deregulation of many services has increased competition in the service industry. This has led to the need for increased management accounting information to improve productivity and quality
• Advances in Information Technology: Information technology has been one of the most encouraging areas of growth throughout the globe over the past two decades. With automated manufacturing, computers are used to monitor and control operations. As a result, a considerable amount of useful information can be collected, and managers can be informed about what is happening within an organization almost as it happens. It is now possible to track products continuously on a real-time basis and generate information such as units produced, material used, scrap generated, and product cost. Enterprise resource planning has led to the creation of integrated relational databases that allow a variety of users to develop their own reports based on their particular needs. The outcome is an operational information system that fully integrates manufacturing with marketing and accounting data.
• Advances in the manufacturing environment: are characterized by practices such as the theory of constraints, just-in-time, and automation. The theory of constraints is a method used to continuously improve manufacturing activities and non-manufacturing activities. Just-in-time manufacturing is a demand-pull system that strives to produce a product only when it is needed and only in the quantities demanded by customers. Computer-integrated manufacturing is the automation of the manufacturing environment. These changes are affecting such practices as inventory management and product costing.
• Customer Orientation: Firms are competing not only in terms of technology and manufacturing, but in the speed of delivery and response to deliver value to the customer. The cost management system must track information relating to a wide variety of activities important to customers such as product quality, environmental performance, new product development,and delivery performance. In addition, companies must also satisfy the needs of internal customers, such as staff functions exist to support line functions.
• New Product Development: Management recognizes that a high proportion of production costs are committed during the development and design stage of a new product. The requirement to control cost encourages the use of target costing and activity-based management.
• Total Quality Management: Continual improvement and elimination of waste are the two foundation principles that govern a state of manufacturing excellence. A philosophy of total quality management, in which managers strive to create an environment that will enable organizations to manufacture perfect products has replaced the acceptable quality attitudes of the past.
• Time as a Competitive Element: Time is the crucial element in all phases of the value chain. Efforts to decrease non-value-added time are as important as increasing quality.
• Efficiency: While quality and time are important, corresponding improvements in financial performance are equally important. By analyzing underlying activities and processes, it is possible to eliminate those that do not add value, and enhance those that do add value, thereby resulting in dramatic increases in efficiency.

As a result of all these factors, we conclude that the focus of cost management accounting systems has been broadened to enable managers to better serve the needs of customers and manage the firm’s business processes that are used to create customer value.