The Role of Cost Accounting

Cost accounting provides management with costs for products, inventories, operations or functions and compares actual to predetermined data. It also provides a variety of data for many day-to-day decisions as well as essential information for longer-range decisions.

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Managerial Functions

The managerial functions are carried out by the top management group, the president, vice-presidents and other executives; the middle management group, the division managers, branch managers and department heads; and the lower management group, the foremen and supervisors. These groups require comprehensive analytic cost data provided on a systematic basis. Essentially the various managerial groups assist in establishing company objectives and determining that the objectives are realized. There are four basic managerial functions that are common to all activities, no matter how large or small the enterprise:

(1)  planning

(2)   organizing

(3)  Directing

(4)  Controlling.

Planning in Cost accounting

The process of establishing organizational goals (i.e., setting objectives) and a strategy for their accomplishment is known as planning. It is concerned with the future-immediate and/or long range. Middle and lower management planning stem from the goals (i.e., the plan) set by top management. Examples of primary objectives are improvements in market standing, productivity, profitability, managerial performance, and public responsibility.

Organizing

Once objectives are set and a basic plan is established, the process of organizing involves developing a framework for the activity and making specific work assignments. Authority originates with top management and is delegated to the various management levels. A closely related factor is responsibility-the obligation to work to the best of one's ability. The supervisor has the authority to require the particular work, the employee has the responsibility for performance. Accountability-a facet of responsibility-is the obligation to report results to higher' authority. This is an important feature of budgetary control and standard costing, since it aids in the comparison of actual performance with predetermined standards and analysis of causes of difference.

Directing

This is the process by which management achieves its objectives. It requires the ability to supervise and motivate employees in order to obtain optimal levels of productivity conforming to established plans (e.g., budgets or standards for sales, production, costs, etc.),

The modern concept of motivation involves creating a work environment that stimulates superior levels of productivity. On the manager's part, it means providing subordinates with a clear picture of what is expected, necessary guidance, and the feeling that their work represents an important contribution to the achievement of the enterprise's ultimate goals. By effectively communicating with employees and encouraging feedback from them, managers are able to satisfy employee needs.

Controlling

 The process of review, evaluation, and reporting monitors the achievement of goals. It also compares actual results with those projected in planning as well as against actual performance in past periods. There are two facets to reviewing the enterprise's activities: (1) the comparison of actual to projected results and (2) individual traits. This is done because discrepancies on paper can often be traced to employee achievements and/or failures (e.g., good and bad decisions, exceptional or insufficient supervision, and motivation, etc.).

Another kind of appraisal is the internal audit. This is a systematic review and evaluation made by a staff of internal auditors to assure management that

established controls are operating as planned.

Internal auditing today covers accounting, financial and other business operations, such as evaluations of policies, managerial performance, methods, etc. An important part of any review is the reporting of deficiencies and effective recommendations for their prompt correction.

Organization Charts in cost accounting 

An organization chart establishes the flow of authority and responsibility by

Defining the relationships among the major management positions of the enterprise As such, it identifies those persons to whom the various kinds of cost accounting information should go.

For purposes of cost accounting there are two organization charts that we should consider:

1. Company Chart. This chart depicts the flow of authority and responsibility downward from the stockholders, through the Board of Directors, the President, the respective Vice-Presidents and other executives to the operating levels. See Figure 14-1.

2. Controller's Division Chart. The controller is the top accounting officer in the company. As a member of the top management team, his attention should be directed to providing services to all levels of management and to all functions of the company. The technical and detailed activities for which the controller is responsible are prepared by a staff of specialized accountants. See Figure 14-2.

Line and Staff Responsibility

Most responsibilities in a company can be divided into line and staff functions. The line function has the responsibility for decision making, guidance and supervision. The staff function provides advice and service to the line function, but cannot require implementation of its findings. Thus, the controller has line responsibilities (i.e., those that affect his own department) as well as staff responsibility with respect to other departments.

The Cost Department

The cost department is usually supervised by a Controller or Chief Cost Accountant. It is responsible for developing and reporting cost data with respect to materials, labor, and overhead and maintaining the necessary underlying records.

The extent to which the cost department participates in management decisions is prescribed by the definition of cost accounting used by the company. In some cases, the cost department is responsible only for compiling product costs and has no part in analysis for decision making. In others, the wide variety. of cost data needed in making day-to-day operating decisions is provided by a staff of cost accountants who have the ability to provide all types of cost information.

Nature of Cost Accounting

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The broad definition of cost accounting is the process of identifying, summarizing, and interpreting information needed for

(1) planning and control

(2) management decisions

(3) product costing

Note that product costing is number 3, since in most companies the more important activities relate to planning and control and special decisions rather than to the more mechanical aspects of accumulating and computing product costs.

The various activities of a cost department under the broad definition cover a wide range of responsibilities:

1. Preparing data required in planning and controlling operations.

2. Preparing data in connection with day-to-day decisions or special projects that require a choice among alternative courses of action.  

3. Participating in the creation and execution of budgets.

4. Establishing procedures to improve operations and reduce costs.  

5. Developing cost Systems and analyses to improve cost determination and review of variances

6. Cost recording and reporting of costs by product or department.