Accounting is an information system that identifies records and communicates the economic events that occurred within an organization to different users (Weygant, 2002). The principles of accounting have been around for over 500 years. One of the major areas of study of accounting which has numerous practical applications for the accounting systems of businesses worldwide is cost accounting…
The traditional cost accounting systems determine cost by adding direct material, direct labor and overhead. Direct labor is utilized as a cost driver in the determination of overhead. The purpose of this paper is to analyze changes in cost accounting and the different cost systems companies are utilizing which eliminate the profession's historical reliance on determining products cost utilizing direct labor as its main variable.
Major changes in the way business is perform in the 21st century made the utilization of direct labor as a cost driver obsolete. A study performed on 37 factories revealed that sophisticated automated equipment was increasingly replacing direct labor and in these factories direct labor accounted for only 10% of its direct sales (Garrison & Noreen, 2003). Direct labor is becoming a variable whose correlation with sales is becoming smaller as businesses continue to evolve. CPA Mike Weir mentions that traditional costing systems do not reflect costs in the various stages of production accurately nor do they provide feedback on the cost changes affecting planning and job estimates (Nash, 1999).
Accountants are starting to use different methods to calculate costs other than absorption costing (DM+DL+OH). A new type of accounting which visualizes and determines cost in a different manner is lean management accounting. The methodology utilized in the accounting system follows a similar line of thinking to the engineering lean manufacturing methods as far as eliminating waste or unnecessary processes from a system or method. The reporting of costs within production must be such that the waste is clearly visible to the people responsible of the process allowing transactions to be created when the product is completed on the floor
(Maskell & Baggaley, 2007). Traditional accounting methods followed the path of tracing costs as they moved from department to department which did not provide a clear basis of determining if any value was create in any particular process. One of the main advantages of lean management accounting is that it provides manager the cost information necessary to measure performance and effectively control and continuously improve the value stream (Maskell & Baggaley, 2007).
Accounting information systems are suppose to provide the decision makers with up to date accurate information about the costs incurred. When dealing with projects such as those in the construction industry the project manager must be able to control and monitor costs to enable successful completion of the project. These professionals utilize different forecasting cost control activities to help them determine overall costs. Some of the techniques utilize by project managers are: budgeted costs, estimated total costs, cost commitment, cost exposure, cost to date and over / under (Cmu). Absorption costing system do have the capability of providing project managers with precise updated data they can utilize to determine the progress of the project.
Engineers and inventors require a cost system that allows them to visualize and determine cost for different particular elements within their design process. Current cost modeling is not adapted to deal with multiplicity levels of abstraction associated with an emerging design (Scanlan, J. et al., 2002). One constraint that traditional cost models have is that is cost elements are ...
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