Southwest Airline Co. and Cost Accounting

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Southwest Airline Co. and Cost Accounting
Southwest Airline Co. is a major passenger airline that provides scheduled air transportation in the United States. Southwest provides point-to-point service which allows the use of key assets, including aircrafts, gates, employees, and the ability to provide frequent, conveniently- timed flights and low fares. Southwest Airlines has built its culture from the inside out and believes that the satisfied employees will keep customers coming back.

Southwest Airlines operates with a low-cost structure that is designed to allow it to charge low airfares. With that said, cost accounting can have a pervasive influence in this and other organizations. From the company’s 2006 annual report-Disclosure Regarding Forward-Looking Information, Item 1A. Risk Factors; fuel price volatility presents one of the company’s most significant challenges. Southwest for the past five years of this annual report, has hedged its fuel risk as part of its lost cost strategy. While this also demonstrates the use of cost accounting, the company entered into fuel derivatives contracts to protect against rising fuel costs.

Southwest Airlines uses cost accountants in contributing to the external financial reports such as inventory valuation as noted on page 55, under Notes Consolidated Financial Statements – (Continued) – Inventories, which consists of flight equipment expendable parts, materials, aircraft fuel, and supplies. The cost accountant determines the valuation method that is in the best interest of the company and favorable to the stockholder. There is an advantage to having cost accountants, they create reports used strictly for internal use and are not restricted to generally accepted accounting principles (GAAP).

A cost accountant is free is use any costing paradigm that will result in an informative report for management. Such reports may consist of, but limited to job costing, direct costing, activity-based costing, process...
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