current cost accounting methods challenge for accounting profession lívia rác, dr györgyi...
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CURRENT COST ACCOUNTING METHODS
CHALLENGE FOR ACCOUNTING PROFESSION
Lívia Rác, dr Györgyi PetkovicsFaculty of Economics, Subotica, Serbia 2008.10.02.
Overview
• The place of cost accounting
• Development of cost accounting
• Importance of cost calculation
• Modern costing systems
• Traditional vs. modern costing
• Conclusion
Overview
• The place of cost accounting
• Development of cost accounting
• Importance of cost calculation
• Modern costing systems
• Traditional vs. modern costing
• Conclusion
The place of cost accounting
Accounting
Financial acc. Managerial acc.
bank
gove
rnm
ent
customer
supp
lier
Cost accountingcompetitor
Overview
• The place of cost accounting
• Development of cost accounting
• Importance of cost calculation
• Modern costing systems
• Traditional vs. modern costing
• Conclusion
Development of cost accounting
Traditional systems Modern systems
- Actual costing
- Normal costing
- Standard costing
- Target costing- Department c.- Activity-based c.- Variable c.- BSC
Overview
• The place of cost accounting
• Development of cost accounting
• Importance of cost calculation
• Modern costing systems
• Traditional vs. modern costing
• Conclusion
Importance of cost calculation
How to assign indirect costs (tip for the waiter) to products?
Overview
• The place of cost accounting
• Development of cost accounting
• Importance of cost calculation
• Modern costing systems
• Traditional vs. modern costing
• Conclusion
Modern costing systems
- Target costing- Department c.- Activity-based c.- Variable c.- BSC
Modern costing systems
Target costing – focuses on target cost per unit, which is the estimated unit cost of a product that, when sold at the target price, enables organization to earn the target profit per unit.
- locked in = designed in costs - cost incurrence
Department costing – instead of a single allocation base, uses separate indirect-cost rates for each department. It supposes that each department has different allocation base.
Modern costing systems
Activity-based costing – a technique for calculating object costs, in the way that overhead, selling, general and administrative costs assigned to an object reflect the overhead services actually consumed by that object.
activity
resources
cost object(product, customer...)
activity cost pools
General ledger cost data
cost object(product, customer...)
cause-effect relation
Modern costing systems
Activity-based costing- every company has to determine its true economic costs
with understanding the costs relation to its products/services
- ABC is a simple concept that can be, and has to be adopted in a wide variety of ways
Balanced Scorecard concept – translates a company’s strategy into a comprehensive set of performance measures.
Financial Customer Internal bus.
process Learning
and growth
Overview
• The place of cost accounting
• Development of cost accounting
• Importance of cost calculation
• Modern costing systems
• Traditional vs. modern costing
• Conclusion
Traditional vs. modern costing
Traditional costing Activity-based costing
Only manufacturing costs are assigned to products.
Manufacturing as well as non-manufacturing costs can be assigned to products (some manufacturing costs may be excluded from product costs).
Selling, general and administrative expenses are period expenses.
Selling, general and administrative expenses can be assigned to products if there is a cost-effect relation between them.
Traditional vs. modern costing
Traditional costing Activity-based costing
A single overhead rate is used for the entire factory: direct labor- or machine-hours.
A number of overhead cost pools exist, with different allocation bases.
Costs of unused capacity are assigned to products too.
Costs of idle capacity are not assigned to products (only the costs of capacity they use).
Overview
• The place of cost accounting
• Development of cost accounting
• Importance of cost calculation
• Modern costing systems
• Traditional vs. modern costing
• Conclusion
Conclusion
- New expressions: idle capacity, cost pools, activity-based concept, sunk cost, value- and non-value added costs, target pricing, relevant costs, etc.
- most cost systems are based on financial accounting’s rules because of:
- behavior problem- financial problem- technical problem
- there is a need for maintaining two cost systems parallel
Conclusion
- managers need a road map
- with modern costing methods company has to make a self-portrait
- ABC is a concept to adopt, not the system to install
- the accounting profession continuously has to improve costing methods, to provide a true picture about the company’s cost structure
“Far better an approximate answer to the right question, than the exact answer to the wrong question.”
(John Tukey, Princeton University.)