The Role of Cost Accounting in Business Planning, Control, and Decision Making - Essay Example

01-03-2007 Cost Accounting Traditionally, cost accounting is considered as the technique and process of ascertaining costs of a given thing, Insixties, the definition of cost accounting was modified as the application of costing and cost accounting principles, method and techniques to the science art and practice of cost control and ascertainment of profitability of goods, or services. It includes the presentation of information derived there from for the purpose of managerial decision-making. It clearly emphasizes the importance of cost accounting achieved during the period by using cost concept in more and more areas and helping management to arrive at good business decisions. Today, the scope of cost accounting has enlarged to such an extent that it now refers to the collection and providing all sorts of information that assists the executives in fulfilling the organizational goals. Modern cost accounting is being termed as management accounting, since managers being the primary user of accounting information are increasingly using the data provided by the accounts, setting objectives and controlling the operations of the business. Today cost accounting is much more than an inventory cost tracking system. Cost accounting involves determining the costs of products and activities, but it does have a broader role; to furnish management with information used in planning and controlling activities, in improving quality and efficiency, and in formulating strategic policy. To be more specific, cost accounting can help management achieve the following: Formulating and implementing plans and budgets that motivate employees toward the achievement of company goals. Establishing cost tracking methods that allow control of operations, cost savings and improvement in quality. Controlling inventory cost, minimizing inventory investment, and determining the cost of each product or service. Pricing products and services in ways that are congruent with organizational goals. Making prudent decisions that impact both short-term and long-term revenues and expanses. Technological changes and management innovations are drastically changing the nature of costs. Many technologically advanced companies have lower inventory levels; use less labor and often experience increasing levels of fixed costs. These developments are interesting and exiting, but they are also challenging cost accounting systems to provide reliable, useful information, data that can be used to keep an organization efficient and most of all competitive in the global market. The cost and management accounting is responsible for generating financial information required by the firm for internal and external reporting. This involves responsibility for collecting, processing and reporting information that will help managers in their planning, controlling and other decision making activities (Hanson & Mowen, 2005). The detailed formulation of future actions to achieve a particular end in the management activity called planning. Planning therefore requires setting objectives and identifying methods to achieve those objectives. An organization may have the objective of increasing its short term and long-term profitability by improving the overall quality of its products. By improving product quality, the organization should be able to reduce scrap and rework, decrease the number of customer complaints and the amount of warranty work, reduce the resources currently assigned to inspection and so on, thus increasing profitability. This is accomplished by working with suppliers to improve the quality of incoming raw materials, establishing quality control circles, and studying defects to ascertain their causes. So cost accounting plays major role in management planning and control of organization. Similarly cost accounting plays effective role in the decision making process in the organization as well. The process of choosing among competing alternatives is decision making. Decision can be improved if information about the alternative is gathered and made available to managers. One of the major roles of cost accounting to manage and provide information that facilitates decision making. The pervasive managerial function is an important part of both planning and control. A manager cannot plan without making decisions. Manager must choose among competing objectives and methods to carry out the chosen objectives. Only one of numerous mutually exclusive plans can be chosen. In the area of decision-making, cost accounting if adequately and properly applied should provide information regarding which products to produce among alternatives. Decisions affecting pricing, selling a product at separation point or processed further, delegating a product line and make or buy decisions are all output of good cost accounting practice. Business ethics is learning what is right or wrong in the work environment and choosing what is right. Business ethics could also be described as the science of conduct for the work environment. For organizations and professionals, ethical behavior principles can be expanded to include concepts such as objectivity, full disclosure, confidentiality, due diligence and avoiding conflicts of interest. Attention to business ethics can bring significant benefits to a company. Companies with a strong code of ethics can create strong customer and employee loyalty. Observing ethical practices now can avoid later litigation costs. Organizations and professional association often establish a code of ethics or standards of conduct for their managers and employees. Organization and professional association often establish a code of ethics or standards of conduct further managers and employees. All firms subject to the Sarbanes- oxley act of 2002 must establish a code of ethics. A survey taken by Deloitte & Touche LLP and the Corporate board member magazine in 2004 revealed that 83% of the corporations surveyed had established formal code of ethics, 98% agreed that an ethics and compliance program is an essential part of corporate governance and 75% of those with code of ethics were actively monitoring compliance. The institute of management Accountants (IMA) has established ethical standards for management Accountants. Management accountants are subjected to this professional code and have been advised "they shall not commit acts contrary to these standards nor shall they condone the commission of such acts by others in their organizations". The code have five major divisions i.e. competence, confidentiality, integrity, objectivity, and resolution of ethical conflict. Ethics plays an important role when customer is willing to buy services rather than buy products. The internal accountant who is responsible to gather data on service quality must accurately report the bad news as well as good news. Post Enron, the most noticeable change occurs in the new roles and tittles and the newest is chief accounting officer. CFO's do not want to be blamed for weakness in accounting functions, so companies are bringing in this extra layer of management, hiring chief accounting officers to handle reporting and compliance and work outside auditors. Companies are really holding managers accountable for ensuring their numbers are accurate, and doing more due diligence to make sure the people they hire are credible and ethical. Steve Shalak, partner in the corporate investigation practice of PWC in New York, says that companies also should not forget one of the most important and most counter intuitive lessons learned from Enron and other business ethics-scandals that communicating stories of bad behaviors has substantial deterrent effects. The new wave is business process improvement through accurate, real time reporting, looking at low finance can leverage technology to capture efficiency, saving and activity based costing and to trace profits. So getting the accounting right is particularly important. It needs careful looking at how companies account for liabilities in terms of reserves and complex hedging transactions and whether they account for revenue properly. Reference:- 1. Hanson, Don R., Mowen, Maryanne M. (2005). Cost management: Accounting & Control, Thomson South- Western. 2. Deloitte & Touche LLP & Corporate Board Member Magazine (2004). " Business Ethics and Compliance in the Sarbanes-Oxley Ea: A survey. (http:// www.deloitte.com/US /Corpgov as of May 11, accessed on 27th Feb.2007. Read More