Cost Accounting in Theory
The last two decades has seen a revolution in management accounting theory and practice due to the challenges of the competitive environment in the 1980s. Kaplan and Johnson (1987) identified the failings and obsolescence of existing cost and performance measurement systems, which led to the re-examination of traditional cost accounting and management control systems. Conventional financial and management accounting methods have developed primarily as a result of corporate legislation in the 1930s forcing companies to provide externally published financial accounts. Management accounting is primarily focused as a decision making tool for running a business, hence they require more flexibility. According to Kaplan, management accounts have become a subset of financial accounts and that they reflect more on the external rather than internal requirements of the company. Most of the managerial decision-making and control systems in use in the late 1980s were described by Johnson and Kaplan as stagnant. As a result, they went onto research in new accounting systems raising the profile of internal accounting systems by use of financial and non-financial measures. Although their work was at first seen as controversial, it is now considered of key importance for companies aiming to enhance their competitive position and performance.
The purpose of cost accounting is to ascertain the costs of products and services. When properly implemented, the cost accounting function will provide necessary information for pricing decisions, identify the profitability of each product, service, or job, aid management in maximizing profits by detecting sources of wastages and excess capacity, and can influence management behaviour. In theory, cost accounting help managers make decisions to fulfill an organization’s goals.
Cost Accounting in Practice
However, according to a July 2003 study done by the Institute of Management Accountants and Ernst and Young, 98% of managers believe their cost data is distorted while almost 40% believe their cost data is significantly distorted. In practice, most companies still use the same cost accounting and management control systems that were developed decades ago in a competitive environment drastically different from today. In the many cases worked on throughout the semester in Accounting Planning & Control, for example Putz, Seligram Inc. and Zytec, there was an underlying problem of inaccurate costing information that failed management when making decisions. This was due to the traditional cost systems that these companies utilized despite the changing nature of their business environment. One of the main triggers that a company will need a new cost system is when changes occur in the organization and its environment. The article “You need a new cost system when...” highlights the many signals in which a company needs to redesign or create a new cost system. This article proposes that a cost system must be up to date and functioning properly in order for the theory of cost accounting to be applied in practice. The problem with the state of the accounting profession is the skewed emphasis towards Financial Accounting, as identified by Kaplan. Financial Accounting is used to prepare financial statements for external users. These Financial Accounting reports are for outsiders to assess the business, but the reports focus on compliance with GAAP in broad totals and are not designed to support decision making. Despite this fact, 80% of organizations rely on the GAAP required Normal Costing method to provide management with reports (Sharman and Mackie 12). When management reports echo standard financial reports, management loses. These reports have no activity data and often require managers to prepare their own ad hoc reports when they require decision analysis. These financial reports are difficult to understand by non-accountants and do little to give managers the...
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