SCOPE OF COST ACCOUNTING

Cost accounting is generally considered applicable only to manufacturing operations. This opinion is not valid in today's economy; every type and kind of activity, regardless of size, in which monetary value is involved, should consider the use of cost accounting concepts and techniques. Non manufacturing activities of manufacturing firms, wholesale and retail businesses, banks and other financial enterprises, insurance companies, transportation compa­nies, railroads, airlines, shipping companies, bus companies, schools, colleges and universities, hospitals, governmental units on local, state, or federal levels, churches, and welfare organizations — all should employ cost ac­counting in order to operate efficiently.)These many types are not considered individually in this text; however, at appropriate places, mention will be made regarding the use of specific costing concepts and techniques in certain of these activities. In other cases it is a matter of recognition by the management and its accounting staff of the applicability of these concepts and techniques to their own special non manufacturing and nonprofit fields of endeavor.

THE COST DEPARTMENT

The cost department is responsible for keeping records associated with the accounting for manufacturing and non manufacturing activities. To attain the greatest usefulness, the cost department must not only record but also analyze all costs of manufacturing, marketing, and administration for use by management in planning and control. It must, in addition, issue significant control reports and other decision-making data to executives, superinten­dents, and department heads, which assist in controlling and improving costs and operations. The need for the prompt issuance of reports and statements must alert the accountant to modern developments and techniques in the field of communications. Information transmittal problems have too often been overlooked or neglected. Cost control needs or profit opportunities have been delayed or missed because of poor communication. The analysis of costs and the preparation of reports are greatly facilitated through proper sectioning of functions generally listed under the cost department. Proper coordination is also needed, with other functions closely allied with cost accounting, for whⁱch separate departments or sections are often set up; namely, planning and cost analysis and general accounting activities. These functional units should come under the supervision of the controller.

The performance of the functions of the cost department involves the past, present, and future. In profit measurement, as evidenced in the income statement, the accountant is primarily concerned with the proper recording and presentation of costs and revenue for operations and transactions already experienced. When issuing cost control reports, the accountant is working in the present rather than in the past. In developing costs for planning and deci­sion-making purposes, the accountant is concerned with the future.

RELATIONSHIP OF THE COST DEPARTMENT TO OTHER DEPARTMENTS:

The manufacturing departments, under the direction of factory superin­tendents and engineers, design, plan, and control products to their finished stage. In research and design, cost estimates are needed for each type of material, each item of labor, and each machine process before an intelligent decision can be reached in accepting or rejecting a design. Likewise, the scheduling, producing, and inspecting of jobs and products by the manufac­turing departments are measured for efficiency in terms of the costs incurred.

The personnel department interviews, screens, and selects employees for various job classifications. It keeps workers' personnel records and is inter­ested in keeping efficient and satisfied employees. The wage rates and the methods of remuneration agreed upon with the employee form the basis for the computation of the payroll.

The treasury department, responsible for the financial administration, relies upon accounting, budgeting, and related reports in scheduling cash re­quirements and expectations.

The marketing department needs a good product at a competitive price in its dealings with customers. While prices should not be set merely by adding a predetermined percentage to cost, cost cannot be ignored. Pertinent cost data give marketing managers information as to which products are most profitable and assist them greatly in determining sales policies.

The public relations department has the primary function of maintaining good relations between the company and the public in general, especially cus­tomers, stockholders, and employees. Points of friction are most likely to be prices, wages, profits, and dividends. The cost department is often called on to provide basic information for public releases concerning these policies and practices.

The legal department finds cost accounting helpful in keeping many af­fairs of the company in conformity with the law. The Federal Wage and Hour Law, terms of industry-wide union contracts, the Robinson-Patman Act, so­cial security taxes, unemployment compensation taxes, the Employee Retire­ment Income Security Act of 1974, as well as income tax, are some of the areas where the legal and cost departments need to cooperate.

Starigic managment

Prelude

Today’s world is turbulent. It has all types of complex problems. Stock Markets are tumbling globally. Business confidence is declining. Unemployment is on the increase. Recession signs are apparent, although some do not firmly believe in this. Countries like USA have distributed cash stimulus (Dollar) to persons in USA to ensure maintenance of purchasing power of public. Many countries are facing default situation due to repayment of debts. Three hundred (300) banks have failed in USA. Risk management has not been working properly. Corporate governance, though talked much, is not being implemented with sincere spirit. All in all, financial distress is seen globally with great concerns.

In this backdrop, there are no better days than today to embark upon the marketing of Strategic Management Accounting Practices to first halt the financial mis-management and later reverse the process to usher in an era of prosperity, economic development        cushioned with an accelerated development support with socio economic development alongwith social justice.

Management Accounting: Changing Roles So far Management Accounting has gone through the following four stages:

1.            From beginning to year 1945

2.            From 1945 to 1973

3.            From 1973 to end of the 20^th century

4.            21^st century challenges

Each of the above stages are briefly reviewed below:

1. From beginning to 1945

There was an emphasis on “Cost Components” namely, material, labour, and overheads. Books written by authors from UK (e.g. Cost Accounting by Biggs and by Wheldon) were in big currency in the world. Professional institutes governing the costing profession were known as Institute of Cost & Works Accountants. There were several changes with little global interaction. External factors did not affect business enterprises and work flowed smoothly. The role of Cost Accounting was a score keeper and computation of various components of costs. Efforts were also made to reduce costs where-ever it was feasible.

2. From 1945 – 1973

Curricula of Professional Institutes regulating costing profession underwent major revision and updating. The lead was provided by Chartered Institute of Management (CIMA), London. However in all other professional institutions which were charged with the responsibility of developing professionally qualified cost accountants changed their names and the role of management accounting got pronounced in a significant manner. Except for one institute, all other institutions globally changed their names to Institute of Cost and Management Accountants. Accordingly, a theme of Management Accounting which was in a narrow perspective of cost alone became very popular and business community became keenly interested in employing Management Accountants.

3. 1973 -2000

The world witnessed three time increase in the price of oil in 1973 and later in 1979. This created lot of challenges in terms of reading future and its impact and also stimulated interest in Cost Management with a focus on reduction of cost of fuel. Alternate sources of energy were innovated and introduced. Accordingly, Management of various enterprises came under heavy pressure for careful study of the impact of increase in fuel prices on their profitability. Many air companies introduced “Business Class” as “an another section in their aeroplanes rather than continuing with two classes namely, Economy and First Class. Subsequently even a new class namely, “Economy Plus” was also introduced. Therefore, Management Accountants were more concerned with futurology as a discipline through studying its careful impact on businesses. Consequently Management Accounting in the first wave and later Strategic Management Accounting in the second wave became very important and therefore the role of management accounting became more pronounced. During this period, the rise of new management tools e.g. TQM, ERP, BSc etc. had healthy impact on bottom line and this facilated  Management Accountants for their application to beef up the bottom line. 

4. 21st Century

Strategic Management Accounting has assumed holistic approach with creation of value as an important focus. Consequently the role of management accountants, backed up by application of various tools of strategic management accounting, has assumed significant importance.

Global Challenges

The world has become a small village. The dawn of internet and the rise of WTO regime have brought spectular changes in the world. Idealogical barriers have demolished and global trade has assumed free movement.  Based on World Development Report of 2009, global exports were $ 13.84 trillion dollars. The world focus is on the following four challenges:

1. Structure

Regulatory frameworks are changing. Financial architecture is under going significant changes. The world is faced with structural changes.

2. Social

Social values are changing fast and materialism continues to be following business philosophy. The labour is ever demanding in developing countries and there are more problem in developed and developing countries in this respect.

3. Financial

The world is in grip of financial crises. Globally stock markets have tumbled and 300 banks have failed in USA. It is interesting to note that countries like USA and UK are also in big trouble. In USA even cash stimulus to get the purchasing power of the consumers in tact has been pursued.  Many countries are facing default position and the role of IMF has become more pronounced. IMF has $ 200 billion for bail out of developing countries financial problems. Japan has assured for further assistance.

4. Technology

There is a pressure on every country and every enterprises to innovate, failing which disaster is ahead. Product Life Cycles are becoming shorter. In the light of above challenges are multifaceted and renewable strategic management accounting practices are the expected outcome to face the challenges in a confident manner.

Rise of SMA and Global Competition

Strategy focuses its attention on the following three aspects:

1.            Study of environment.

2.            Making right kind of  managerial decisions.

3.            The above two aspects must result in beneficial effect on the enterprises.

Strategic Management Accounting, therefore, faces a great challenge for the guidance of right kind of decision. Guidance is needed from the five points contributed by Noble Laurate, Herbat Simon.  His five point guidelines for decision making as is popularly known as “Administrative Man Model” needs to be followed. All enterprises must re-visit their mission statements and redefine their goals. Management Accounting can contribute an information base via cost and revenue drivers. 

Logistics for SMA

The following logistics can extend supportive role to operationalise SMA in real life:

1.            There should be total management support.

2.            There should be a change in the mind set for acceptance of SMA Tools.

3.            A thorough cost and revenue analysis should be undertaken for a careful analysis to maximize profit through revenue drivers and minimize cost through cost drivers. Accordingly the bottom line will be beefed up.

4.            Knowledge Management should be operationalised with introduction of Business Process

5.            Outsourcing (BPO), Knowledge Process Outsourcing (KPO) and later Engineering Process Outsourcing (EPO).

Important Tools for SMA

TOOL	NATURE
Activity Based Costing	An analytical tool aims to provide accuracy in allocating indirect costs.
Balanced Scorecard	An accounting report of critical success factors about the organization. It is divided into four major dimensions: financial performance, customers, satisfaction, internal operation, and innovation and growth.
Benchmarking	A process performed to determine critical success factor and study ideal procedures of other organization in order to improve operations and dominate market.
Competitive Advantage Analysis	Defining Strategy that an organization could adopt to excel over rivals.
Continuous Improvement	Conducting continuous improvements in quality and other critical success factors.
Just-in-Time	A comprehensive system to buy material or produce commodities when needed in appropriate time.
SWOT Analysis	A systematic procedure to identify critical success factors of an organization.
Target Costing	Cost that an organization is willing to incur according to competitive price that could be used to achieve desired profit.
Theory of Constraints	A tool to improve rate of transferring material into finished goods.
Total Quality Management	Adopt necessary policies and procedures to meet customers expectations.
Value Chain Analysis	Add value to customers reducing costs, and understanding relation between business organization and booth customers.

Source:         Extracted from: A framework to Accomplish Strategic Cost Management, Mohamed M. AlDyasty, Associate professor, Department of Accounting Mansoura University, Mansoura 

Conclusion

It is high time that SMA be operationalised. In this respect new breed of Management Accountants is the crying need of today. The stakeholders namely, Professional Management Accounting Institutes, their members, business community, curriculum changes, growth of need breed of management accountants, their professional training and regulatory framework represent agenda for pursuing the same. The earlier these challenges are met, the better. We should stand committed and productive results will follow out of application of SMA tools.