Actual cost reporting is a reliable method of cost reporting for little companies with low sales volume. However, it is not practical for bigger companies to utilize this kind of cost reporting. As smaller companies grow they need to acknowledge that an official cost management system is necessary. In order to analyze official incorporated cost management systems it is necessary to define cost management systems, understand the scope of these systems, acknowledge the goals of these systems, and think about the items that influence the design of these systems.
A cost management system is a method that is made use of to plan and manage the decisions a company makes regarding cost generating activities, in order to lower product cost and boost product value for consumers. Cost management systems offer information that assists management make long-term and short-term decisions concerning “” amounts and kinds of materials being utilized, changes in plant procedures, and changes in product design”” (Horngren et al, 2006, p. 2-3). Ultimately, cost management systems are made use of to help choose that will increase short-term profit and enhance the long-lasting position of the company.
An There’s So Much More To Discuss
3 of the most common costing systems are task order costing, process costing, and activity-based costing (ABC). Task order costing is utilized by companies that produce products for specific orders. This kind of system estimates the costs associated with producing goods for different tasks (Atkinson et. al., 2005, p. 79). Process costing is typically utilized by companies that operate utilizing constant processing. This type of system applies the costs of assistance, labor, and production activities as the goods travel through the different process stages (Atkinson et al, 2005, p. 92-94). ABC is a two-stage method of assigning costs. In the very first phase, costs are allocated to swimming pools and in the 2nd stage the cost swimming pools are designated to products or services (Edmonds et al, 2006, p. 233).
So, what does that mean?
Cost management systems cover a broad scope of activities and “” should not be analyzed to suggest just constant reduction in costs”” (Horngren et al, 2006, p. 3). These systems different product costs into three classifications: direct material, direct labor, and overhead. Cost management systems do more than that. They assist management measure numerous cost activities, such as production volume, sales volumes, device hours, manpower hours, volume of product made use of, and so on. Making use of the information supplied by the cost management system, management might deciding that appear to enhance costs. Management might choose to increase marketing costs. This increases costs at first, however the goal is to ultimately improve earnings later on.
Moving The Discussion Forward
Motivation – A company needs to initially set organizational goals, and after that produce measurements to figure out whether those goals are being reached, in addition to train and inspire management to reach those goals. For example, management may look at prior year income statements and keep in mind that earnings increased by 42 % from 2003 to 2004 and 45.54 % from 2004 to 2005. Based upon that information, management might set a goal to enhance earnings by 50 % from 2005 to 2006. When this goal has actually been set, the company must develop measurements that can be used to figure out throughout the year whether the company is likely to satisfy that goal at year end. In addition, the company needs to provide training and inspiration to supervisors in order to enhance the likelihood of reaching the goal.
Together with activity based accounting a method called Balanced Scored which clarifies the financial steps and the criterias for efficiency were provided as goals, literally every goal is made as step to accomplish the anticipated performance. This included virtually everyone in an organization and the managers were able to set short-term goals to accomplish a long term goal.
Information – the system must be created so that it provides information which assists management strategy, control, deciding, and evaluate performance. A fruit juice company may decide that it desires to assess information regarding overall juice costs, as well as apple juice costs and grape juice costs individually. In order to design a system for this company, requirements would consist of the capability to provide information on unit production, production costs, unit sales, unit prices, total list prices, and cost of goods sold.
Reporting – the system ought to be created so that it provides reports with the necessary information in a way that management can use in order to make decisions. The reporting function of any system is of great significance. The company must decide how the information should exist and then develop the system so that the information is arranged and shown in the manner most useful to management.
Real cost reporting may work for smaller sized companies, but as a company grows it will become increasingly more difficult to utilize that kind of cost reporting. An integrated cost reporting system will be important to the company, as it will assist management with planning, managing, and decision-making.
Any distortions in cost that were caused by calculating what the overhead of a product is versus what a unit cost is for companies that focus on just one specific product are very minor in markets that mass produce that product with a low set cost. Understanding why costs vary compared with exactly what was really planned helps a supervisor to save a company money by doing something about it that are proper to fix that variation in the future. Variation analysis is a crucial part of cost accounting due to the fact that it breaks down each differences into many different elements of conventional cost and actual cost. A few of these elements are material cost variation, volume variation and labor cost variation.
Cost accounting is a crucial part of the management accounting process. In order for managers to figure out the best approaches to increase a company’s success, in addition to saving a company money in the future, cost accounting is a necessary system in the management of a company’s budget, supplying important information to assess change in company production costs.
Atkinson, A.A., Kaplan, R.S., & & Young, S.M. (2005). “” Management accounting.”” (Custom ed.). Upper Saddle River, NJ: Pearson Custom Publishing.
Edmonds, C.D., Edmonds, T.P., Olds, P.R., & & Schneider, N.W. (2006). “” Fundamental supervisory accounting ideas.”” (3rd ed.). New york city: McGraw-Hill Irwin.
Horngren, C. T., Datar, S. M., & & Foster, G. (2006). “” Cost Accounting: A supervisory focus.”” (12th ed.). Upper Saddle River, NJ: Pearson Prentice Hall.