Role of Costing and Cost Accounting in the Organization

Purposes of Accounting Systems

Accounting is a major means of helping managers of an organization, equity investors of an

organization, potential equity investors, creditors and bond holders of an organization, potential
creditors and bond holders of an organization, suppliers and customers of an organization and
other stake holders to take decisions.

Accounting provides information for three major purposes:

1. External reporting: These reports are used investors, creditors, government authorities, and
other outside parties.

2. Routine internal reporting: These reports which are periodically generated are used by
managers of the company for their internal decisions.

3. Nonroutine internal reporting: This information or reports are generated to support projects
and other decisions that come up as the need arises from them.
While the reports are prepared in different formats and basic data is manipulated or summarized
in various ways to facilitate decision making, there is one data base maintained by the accounting
system that contains data in the form debits and credits to various accounts maintained in the
accounting system. Accountants combine these data items in various ways to provide
information to internal or external users.

Distinction Between Financial Accounting, Cost Accounting and Management Accounting

Horngrens distinction between them is interesting.

Management accounting as a discipline focuses on accounting information that facilitates

decision making by managers of the organization. If focuses on routine and nonroutine
accounting reports.
Financial accounting measures and records business transactions and provides financial
statements that are based on generally accepted accounting principles (GAAP). Executive
compensation is tied to profit figures reported in the financial statements and equity share
valuation is also based to a large extent on these financial statements.
Cost accounting provides information to facilitate both management accounting and financial
accounting. Its focus is measuring and reporting financial and nonfinancial information that is
related to the cost of acquiring or consuming resources by an organization.

Cost Management

Cost management is an activity of managers related to planning and control of costs. Managers
have to take decisions regarding use of materials, processes, product designs and have to plan
costs or expenses to support the operating plan for their department or section. All these activities
come under cost management. Information from accounting systems help managers in cost
management activities. But the cost accounting system and the reports it generates is not the cost
management system. Accounting system can be interpreted as a part of cost management system
of an organization.

Cost management is not cost reduction alone. It is much broader. Organization increase
advertising expenditure to increase sales, increase research and development expenditures to
promote new products. Here the concerned managers are deliberately incurring additional costs
in a period (compared to the previous period) as they expect profits from such decisions or
expenditures. Cost management system has to ensure that a cost is incurred with the expectation
of profit.

The Role of Management Accounting

The role of management accounting is also described as problem solving, score keeping and
attention directing.

Problem solving: The role of accounting in problem solving is to provide information useful in
evaluating alternatives.
Scorekeeping: Scorekeeping records the results of various actions of the managers and helps in
assessing whether the results expected from the various actions are realized or not.

Attention directing: The scorekeeping function in combination with expected results, and
comparative analysis of scores of various companies, divisions and departments, comparative
analysis of present period scores or results with previous periods show opportunities of focusing
attention of managers to improve things.

Value Chain
Value chain is a visualization of complete business as a sequence of activities in which
usefulness is added to the products or services produced and sold by an organization.
Management accountants provide decision support for managers in each activity of value chain.

Design of Management Accounting System

The design of management accounting system has to take into consideration the decision needs
of the managers. Also it has to take into consideration the new themes and challenges that
managers face currently.

Horngren identified four such themes in the tenth edition of his book.

1. Customer focus: The challenge for managers it invest sufficient resources to enhance customer
satisfaction. But every action of the organization has to result enhanced profitability or
maintained profitability for the organization.

2. Key Success Factors: These are nonfinancial factors which have an effect on the economic
viability of the organization.

Cost, quality, time and innovation are important key success factors. Management accounting
systems need to have provisions for tracking the performance of the organization and its
divisions as well as competitors on these success factors.
3. Continuous improvement: Continuous improvement or kaizen is a popular theme. Innovation
related to this area in costing is kaizen costing .

4. Value Chain and Supply Chain Analysis: Value chain as a strategic framework for analysis of
competitive advantage was promoted by Michael Porter. Management accountants have to
become familiar with the framework and provide information to implement the framework by
strategic planners.
The term supply chain describes the flow of goods, services and information from cradle (the
mines sources of raw materials) to grave (where discarded products or dumped), regardless of
whether those activities occur in the same organization or many organizations.

Key Guidelines for Management Accounting System Design

Cost Benefit Approach: In the system design resource allocation decisions are to be made.
Examples would be software to buy and associates to employ. A cost-benefit approach should be
used for all such decisions. Resources should be spent only when there is profit to the
organization due to that expenditure. Each incremental addition to the accounting system must be
supported by incremental profit to the organization.

Behavioral and Technical Considerations: Management has human dimension and it has to focus
on how to help individuals to do their jobs better. Managing people involves discussion of
managers with his associates on improving performance. The behavioral responses of people to
reports highlighting their underperformance have to be understood. Management accounting
should lead to cordial relations and climate.
Different Costs for Different Purposes: It is to be noted that there are several cost concepts and
cost measures can be created for each of these concepts. Cost accountants have to careful to
provide appropriate cost to the managers. The accounting system has to have some precautions to
make sure that the accountant understands the decision situation of a manager and provides
appropriate cost measures.

Professional Ethics

Like other professionals, accountants also face ethical dilemmas. They need ethical guidelines.
Institute of Management Accountants (IMA), USA published guidance note on ethics to be
followed by management accountants.

Competence, confidentiality, integrity and objectivity are important themes of the guidance note.

References

Horngren, Charles T., George Foster, and Srikant Datar, Cost Accounting: Managerial Emphasis,
Tenth Edition, Prentice Hall, Inc., Upper Saddle River, New Jersey, USA, 2000

Cost Accounting - Horngren et al., Book Information and Review