Cost Accounting: The Missing part of Supply Chain Management
One of the first questions I ask our Warehouse Management students is, “Do you know your operating costs?”, and our Production Planning Management students, “Do you know the cost to produce one of your items?” After five years of training, I can count on one hand how many students were able to answer these questions, which closest tells me their company does not utilize cost accounting.
The reason students are unable to answer the question is their company only has what is called management and financial accounting in place. Management accounting focuses on historical and estimated data management needs to conduct current operations and do long-range planning. The purpose of management accounting is to build up financial information for use in making economic decisions.
Financial accounting focuses on gathering historical financial information to be used in preparing financial statements that meet the needs of investors, creditors, and other external users of financial information. The statements include a balance sheet, income statement, retained earnings statement, and statement of cash flows. Although these financial statements are useful to management in addition as to external users, additional reports, schedules, and analyses are required for management’s use in planning and controlling operations.
Management and financial accounting focus on the company’s operations as a whole and cannot provide the detail necessary to precisely determine product costs and pricing. At best all they can do is provide averages. In addition, cost accounting provides the detailed cost information management needs to control current operations and plan for the future. Management uses this information to decide how to allocate resources to the most efficient and profitable areas of the business.
Cost accounting enables management to properly allocate costs such as raw materials, labor, and other factory resources to the products truly using then instead averaging them over all products. Without cost accounting, expenses such as major investments in physical assets, developing the workforce, depreciation, taxes, insurance, utilities, machine maintenance and repair, materials handling, production setup, production scheduling selling and administrative expenses are usually lumped together to create an overhead rate which is additional to a product as an overhead markup. The true cost of a product is never determined which method the company is charging too much for some products and not enough for others.
Principles of cost accounting have been developed to permit manufacturers to course of action the many different costs associated with manufacturing and to provide built-in control features. The information produced by a cost accounting system provides a basis for calculating accurate product costs and selling prices, and it helps management to plan and control operations.
calculating Product Costs and Pricing
Cost accounting procedures provide the method to determine product costs that permit the preparation of meaningful financial statements and other reports needed to manage a business. The cost accounting information system must intended to permit the determination of unit costs in addition as total product costs. Unit cost information is also useful in making important marketing decisions such as calculating the selling price of a product, meeting competition, bidding on contracts, and analyzing profitability.
Planning and Control
One of the most important aspects of cost accounting is the preparation of reports that management can use to plan and control operations. Planning is the time of action of establishing objectives or goals for the firm and calculating the method by which they will be met. Effective planning is facilitated by clearly defined objectives of the manufacturing operation and a production plan that will assist and guide the company in reaching its objectives.
Cost accounting information enhances the planning course of action by providing historical costs that serve as a basis for future projections. Management can analyze the data to calculate future costs and operating results and to make decisions regarding the acquisition of additional facilities, any changes in marketing strategies, and the availability of capital.
Effective control is achieved by assigning responsibility for each detail of the production plan by the formation of cost centers. All managers should know precisely what their responsibilities are in terms of efficiency, operations, production, and costs. The meaningful to proper control involves the use of responsibility accounting and cost centers by regularly measuring and comparing results and taking necessary corrective action.