MANAGEMENT AND COST ACCOUNTING

THE IMPORTANCE OF COST AND MANAGEMENT ACCOUNTING AND A BRIEF HISTORY CHAPTER I THE IMPORTANCE OF COST AND MANAGEMENT ACCOUNTING AND A BRIEF HISTORY

THE IMPORTANCE OF COST AND MANAGEMENT ACCOUNTING AND A BRIEF HISTORY Cost accounting is one of a main field of accounting, which provides company managers or owners with a wide range of cost data to find out the cost of a production. Management accounting, on the other hand, is an accounting area that deals with the decision-making process. It analyzes and interprets the cost data obtained by cost accounting so as to make decision-making process be more efficient.

Financial Accounting, Cost Accounting and Management Accounting Financial accounting is a system that identifies, defines, collects, measures, records and reports financial informational for internal and external users. The internal users are owners, shareholders and managers; the external users are investors, creditors and governmental authorities. The company managers use accounting information to manage their businesses, to evaluate employee performances and to calculate taxes to be paid. Moreover, implementing financial accounting is mandatory for companies since it undertakes corporate social responsibility.

Cost Accounting Cost accounting, on the other hand, is a process of cost determination of products or services produced. This process of cost determination is although performed both for internal and external users, it is mainly done for internal users. The data obtained by cost accounting has been particularly used by financial accountants because, financial accounting determines profit or loss by comparing sales costs with revenues. In addition, inventory costs and cost of goods sold data should be disclosed in financial statements, such as balance sheet and income statements. From this respect, the use of cost accounting is mandatory, especially for manufacturing companies

Management Accounting Management accounting (or managerial accounting) is concerned with providing both financial and non-financial information to managers, for planning, organizing, staffing, directing, motivating, coordinating, budgeting, controlling, and reporting. Managers, who are the people inside an organization, use the data obtained by managerial accounting for internal purposes since their primary role is to direct and manage the company to improve its effectiveness and profitability.

The Importance of Cost Accounting in Manufacturing Companies Manufacturing companies should use cost accounting to find cost of a product, to perform planning and control activities and to decide how to manage their activities and businesses. Therefore, cost accounting can be defined as a system in which financial and non-financial information is collected, analysed, classified, recorded, calculated and reported in an organised manner and using an accounting system to find cost of a product or service; to help planning and control activities; and to make decisions. Thus, as stated in the above definition, there are three important functions of cost accounting. These functions are:

Evaluating Cost of a Product or Service Manufacturing companies not only desire to evaluate the cost of production in total, but also need to calculate the product cost per unit. Because, many companies produce hundreds of different products which should be separately costed and priced in today’s global markets. Each product produced may have required different amount of raw material, labour and other manufacturing costs. As a result, although the total cost of production remains unchanged, unit cost of each different product may vary depending on the consumption of those cost elements such as material, labour and other items, known as factory overhead. Therefore, the cost of each product should be determined separately. This also helps planning, control and decision-making processes be performed properly.

Planning and Control Planning and control is a basic process of companies for realizing their activities and for earning profit in the long-run. Planning is referred to as the determination of activities to be held in the future by analyzing internal and external opportunities or threats. Data related to these activities can only be obtained using cost accounting. For example, assume that a company wants to plan which type, and how many products to produce next year. A manager of a company will decide on these subjects using cost information. The number or types of a product can only be obtained by means of cost accounting since it provides information by considering the capacity of the business, by analyzing the production processes, and finally by computing capacity cost rates for each unit of a product.

Planning and Control Control is a process of comparing actual results with the results that were evaluated during the planning process. In this respect, companies can analyze success of their activities. If the actual result is the same with the desired result, it can be said that companies achieve their goals. However, if the actual result is different from that of planned or desired result, the company will examine the entire production process to realize the reasons of their unsuccessful activities. Moreover, processes being done perfectly are also determined in the controlling phase and their philosophies can be implemented to other areas. As a result, all processes of the company will be improved.

Helping Decision-Making Process Managers cannot make an efficient decision without using cost accounting data. For example, product pricing decision is generally based on the data obtained by cost accounting. Product prices applied to different market segments require proper cost information. Also managerial decisions regarding performance evaluation; to make or buy; to shut off the factory; to change the machine with a new one; to penetrate different markets; to price for contract manufacturing, to identify the factory capacity; to establish different product lines, etc., are determined in the context of cost accounting information. In this respect, companies especially manufacturing ones widely use cost accounting data in their decision making processes.

Historical Development of Cost and Management Accounting Cost accounting is probably one of the oldest managerial tools, which may go far back to ancient times, used in the determination of the amount of taxes that were taken by kings; or used in pricing the products that trading people of antiquity were selling. The trading people of ancient times such as the Chinese, Egyptians and Arabs had accountants in the service of the royal courts, some of whom were experts in the determination of costs.

DEFINITIONS IN COST ACCOUNTING CHAPTER II DEFINITIONS IN COST ACCOUNTING