Cost (Management) Accounting Adds Value to an Entity - Research Paper Example

Vanderback)i Cost or managerial accounting is modern day useful accounting technology that helps departments of a business in variety of ways. Some of its major applications are as under: Inventory valuation: Costing helps in calculation of cost per unit. This cost per unit is employed to value inventory for financial statement and other purposes. Record costs: Costs associated with a product or service need to be recorded for the purposes of preparing income statement in order to evaluate the performance of the department and company over the selected financial period.

Pricing of products and services: Cost per unit is helpful in the business to tag sale prices to its products and services. For example, if the cost of a product comes to $1.10 per unit, the management of the business may decide to price the product at $1.50 per unit in order to earn a profit margin of ?0.40 per unit. Decision making: Cost information is useful for the business to make important decisions regarding quantity of the production keeping in view demand of product available in the market.

Most business decisions are cost related as the ultimate aim of any business is to earn maximum profits by reducing costs. Practical use of managerial (cost) accounting practices Target costing Target costing is an application of absorption costing. It involves setting a target cost by subtracting desired profit from a competitive market price. Real world users include Sony, Toyota, and Swiss watchmakers, Swatch. In effect it is the opposite of conventional ‘cost plus pricing’. “Sony target costing system got five stages which are target price setting, target margin setting use interactive process and try to meet division’s long term profit objective, target cost setting which target cost is equal to target price minus target margin, and lastly is defined whether group target is met or not.

If group target is met, it will go to final stage which is final decision making.”(Sony Corporation: The Walkman Line)ii Target costing is in fact an adoption of absorption costing.“Under absorption costing both fixed and variable costs are charged to product costs.”(Rajasakeran V.)iiiAbsorption costing is invariably used by most companies in order to determine the full production cost per unit. In target costing Sony first estimate the selling price for a new product. Then reduce this price by its required level of profits.

This provides a target cost figure for product designers to meet. Then it endeavours to reduce costs to provide a product that meets that target costs Marginal Costing Airlines generally use marginal cost concept. “When an airline flies without passengers in its seats that revenue is lost forever. So rather than having a fixed price for all seats for a particular flight it will vary its pricing based on how urgent the passenger wants to make the flight and how many seats are available. If the flight is partly booked it will reduce it ticket prices in the last minute.

Flying an extra passenger will only cost the cost of an extra sandwich. As long as the ticket price is over this extra sandwich cost it will make a profit.” (Skanda Kumarasangam)iv The airlines use marginal costing system. The marginal cost is the extra cost arising as a result of making and selling one more unit of product or service, or saving in the cost