The following essay explains the importance of cost accounting for stakeholders of Multinational Companies, particularly the shareholders & the customers. Who are the stakeholders of an organization? according to (Freeman 1984) stakeholder is “any group or individual who can affect or is affected by the achievement of the firm’s objectives” going by this definition stakeholders of a company would include lenders, creditors, customers, shareholders, government, media, political groups, local charities etc. The main focus of this essay will be on shareholders and customers. A company cannot plan a strategy on to just focus on increasing shareholder value or just focus on customers, neither one leads to the other automatically. Customers want best product for the cheapest price, while shareholders look for value of their investment and the income that is derived from their holding of shares. Shareholder value or customer value cannot be measured simply by numbers; Earnings per share, Return on investments or other ratios are not sufficient which is why financial accounting is not enough. (Langfield): Management Accounting provides managers with essential information for the effective and efficient use of financial and non-financial resources in creating value for shareholders and customers. Focus of management accounting is to effectively achieve shareholder value or customer value with the least possible consumption of the company’s resources. Highlight of modern cost accounting is how costs can be analysed in different ways to meet different information needs of the organisation in its decision making. Identification and tracking of individual costs helps managers in forecasting profits & setting product prices which are key elements in creation and enhancement of both customer and shareholder value. Cost accounting also focuses on what drives value, which costs and which activities have a positive or negative effect in the creation of value for stakeholders. The most important thing cost accounting provides the management is the information in making proper, efficient and sustainable business decisions. Without proper awareness and lack of information managers tend to make poor business decisions, as seen in this classic case of shareholder value verses customer value: (Cleland, Alan S )Schiltz Beer was second best beer maker during 1970s in North America, until management decided that it was dissatisfied with the stock market price, on purely financial basis management looking at income statement, decided to cut on expenses and thus started using less expensive hops in its beer. Looking at the balance sheet they decided to reduce assets tied up in the business so the time used to age the beer was cut. As a result profit margins, asset turnover and stock price all went up, but the beer did not taste the same anymore and masses stopped buying the beer which eventually led both shareholder & customer value down the drain. This shows that there is a fine line between enhancing shareholder and customer value and it’s very critical to maintain a balance between both. In the light of the importance of Shareholder and Customer value mangers rely highly on the tools of management accounting in their decision making. (Words: 510)
Question no. 2
The following essay looks to define cost allocation, cost apportionment, and cost absorption of products, and will compare and contrast activity based costing (ABC) & traditional methods of costing. (Horngren, Datar, Foster...) ‘Cost’ as defined by accountants refers to a resource that is sacrificed or used in purpose to achieve a specific objective. Management or Cost accouting focuses a great deal on establishing what direct & indirect costs are and assigning them to a cost object. Cost accounting focuses on determining the different components of the total cost of manufacturing a product, for e.g.: how much of the total cost were raw materials? How much was the cost of labor...
Bibliography: 1. Bellis-Jones Hill Group, customer case:’DHL-customer profitability in action’ (www.bellisjoneshill.com).
2. CIMA Official Terminology 2005 edition; CIMA publishing.
3. Chutchian-Ferranti, Joyce: Activity based Costing, Journal: Computerworld; (AUT database).
4. Cleland, Alan S :Balancing customer and shareholder value; Financial Executive 1987(AUT database)
5. Colin Drury :Management Accounting for Business (4th edition;) pages 162,163,164 & 202.
6. Criag Deegan/Grant Samkin: New Zealand Financial Accounting 5E pg 47
7. DHL Annual Report; 2007, 2010. (www.dhl.com)
8. Horngren, Datar, Foster, Rajan, Ittner, Wynder, Maguire, Tan: Cost Accounting (1st Australian edition.)
9. Kim Langfield-Smith, Helen Thorne, Ronald Hilton: Management Accounting 5E, pages 6, 7.
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