Table of Contents
1.0. Introduction to Cost Accounting
Cost is defined
Characteristics of Cost
2.1. Assessment of Financial, Management and Cost Accounting
Cost Accounting with International Public Sector Accounting Standards (IPSAS)
A glance at Cost Accounting and the Generally Accepted Accounting Principles (GAAP)
3.1. The Difference between Costing and Cost Accounting
Cost Accounting Objectives
Merits of Cost Accounting
4.1. Cost Accounting As Competed in the Global Environment
Tasks of Managers and Cost Accounting within an Organization
Roadmap to Going Global
Budget is defined
6.1. References List
Introduction to Cost accounting
To make production effectively, costs like labor, overhead and material costs all together must be incurred. In fact in the production process every cost plays it role to make the production effective. Take an example of labor cost no production can take place without labor cost, however much it’s the use of machines but the devices too are controlled by labor or humans.
Cost reveals financial evaluation or assessments of resources prolonged to accomplish the goal like producing conducive service. In other words cost is the driver of all the income and expenditure statements. Costs appear everywhere be it in financial accounting, management accounting and in cost accounting governed by its principles. Therefore it should be noted that cost accounting enables the company and the managers to have information about the period financial reports. But this doesn’t mean that the released reports are the generally accepted ones by the Generally Accepted Accounting Principles (GAAP).
Cost is defined.
A cost is the amount of money spend or used in the production of a product or a service. The production costs may be labor costs, material costs and overhead costs. These costs are controlled by the accounting systems which direct them to the achievement of the formulated organizational objective.
ICWA (Indian Council of World Affairs), India says that cost “is the measurement in monetary terms, of the amount of resources used for the purpose of production of goods or rendering services.
The main characteristics of Cost are:-
a) The term Cost is not complete unless it is fully qualified as its nature and limitations.
b) People use different methods, time, volume and firm in measuring costs therefore it may vary.
c) No cost is exactly true
Assessment of Financial, Management and Cost Accounting
Financial Accounting: As we have observed earlier that accounting information is required to detect the organizational or company destination. Likewise financial accounting acts as a tool for the Detection of the weaknesses and strength of the company. Through financial accounting all parties such as the investors, creditors and the external parties are able to attain the information. The Financial Accounting Standards Board (FASB) gives the Generally Accepted Accounting Principles (GAAP) which enables companies in the process of releasing financial accounting information and as a guideline for managing accounts.
Decision makers are very interested to have the financial accounting information due to the fact that these people are not involved in the date today management of the company. This information enables them to make their choice/decision of where to invest and where not to invest for example to invest in Sonny Ericson or Sum sung following the financial records or information of the company. In most cases public companies are required to release their financial information and get audited by an independent auditing firm. The problem with financial accounting it only considers financial or monetary information leaving aside the non monetary information which in other words makes it costly compared to management accounting.
Management accounting includes all information of both financial and non financial which are released to the internal parties. The difference between financial and management accounting is that financial accounting caters only financial accounting information needed by the external parties but management accounting caters both the financial and non financial accounting information though it is not needed by the FASB and no need of GAAP. The introduction of information technology has contributed more to the use of management accounts compared to financial accounts information. But in recent times people/ managers used to rely on financial accounts information due to their positions held and their experience in accounts.
Companies’ employee managers, accountants and labors to attain organizational goals but all the costs are called production costs. The managers and accountants balance all costs to attain profits and if the costs are greater than the income then that is said to be a loss. Cost accounting Information is intended and calculated for managers to take their decisions within their organizations. The decisions made by the managers are based on the prevailing business environment.
But also cost accounting information is part of financial accounting information basing on the cost accounting system. Cost accounting is also known as managerial or management accounting , is the branch of that provides financial and economic information to the organizational decision makers.
Michael R Kinney, Cecily A Raiborn (2009). Cost Accounting: Foundations and Evolutions 7th ed. Thomson South western. Says That Cost Accounting is the intersection between financial and management accounting. And also that Cost accounting information addresses demands of both financial and management accounting by providing product cost information to external parties, stock holders, creditors and various regulatory bodies for investment and credit decisions and internal bodies.
CIMA, London says that cost accounting is the “process of accounting from the point at which expenditure is incurred or committed to the establishment of its ultimate relationship with the cost centers and cost units.
Relationship of Financial, Management and Cost accounting
illustration not visible in this excerpt
Figure1: Relationship of Financial, Management and Cost Accounting
Source: Michael. R. Kenney 2009.
Cost Accounting with International Public Sector Accounting Standards (IPSAS)
IFAC supports the global adoption and enactment of IPAS for public sector financial reporting. A key issue for public sector financial reporting is that most governments still adhere to the cash basis of accounting, and therefore provide minimal disclosures relative to what the public, banks, investors and credit providers generally expect of the private sector. Current cash based accounting system, which operate in many countries including Tanzania or East African Countries in general may provide inappropriate incentives for decision makers. For example, cash based reporting systems would promote an obvious decision about whether to offer wage increases to government workers nowadays or whether to offer them increased pension benefits that they can access at a future date. Cash based system, which does not require pension liabilities to be recorded and reported, will provide incentives for politicians to opt for the latter. No cash is exchanged nowadays that is to say, there is no increase in reported spending, and hence no pressure to raise debt when the decision is made to offer increase pension benefits. Though an accrual based accounting system that requires pension liabilities to be reported will promote more careful analysis, and could result in an alternative decision to be made when factors such as the government ‘s financial position, net worth and long term sustainability are able to be considered.
The need for accrual based public sector accounting is recognized by various governments all over the globe that already prepare financial statements on an accrual basis. The need is also explicitly recognized the European parliament which is in its report on the proposal for council directive on requirements for budgetary frameworks of the member states, in May 2011, included in its draft legislative resolution that “member states shall have in place public accounting systems, applying the accrual basis of accounting and comprehensively and consistently covering all sub sectors of general government as defined by Regulation (EC) No 2223/96 (ESA 95). Those systems shall be subject to independent control audit.