Purpose of Cost Accounting

Topics: Costs, Cost, Management accounting Pages: 12 (3624 words) Published: August 11, 2011
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Purpose of Cost Accounting


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Role of Cost Accounting

When properly implemented, the cost accounting function can have a pervasive influence in the modern corporation. Unfortunately, it is not always properly implemented because management often is not completely aware of all the uses to which the cost accounting function can be put. This chapter describes the main categories of activities in which this function can become involved, and can be used as a guide by the controller in creating a well-rounded niche for the cost accountant.

The key task for the cost accountant is contributing information to a company’s external financial reports. In many cases where the main accounting function is perceived to be financial reporting (such as in a publicly held company), the other tasks of the cost accountant may very well be subordinated to providing various types of information for these external reports. A key piece of information provided by the cost accountant is inventory valuation, which in turn impacts the cost of goods sold. Several tasks are involved here, such as deciding on the type of cost layering technique (Chapter 13), ensuring that inventory quantities and costs are accurate, and compiling the resulting data into the formats required for external reporting. Other related work may also be needed, such as compiling profitability levels for various product lines, or profit levels by division. The cost accountant may also become involved in the compilation or updating of a few footnotes to the financial statements, though most of these are handled by the financial accounting staff. 11

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The advantage of having cost accountants create reports strictly for internal consumption is that they are not restricted to generally accepted accounting principles (GAAP) when preparing these reports. GAAP requires the use of full-absorption costing in the creation of external reports, which may not be necessary or may even be counterproductive for internal reporting purposes. Accordingly, the cost accountant is free to use any costing paradigm that will result in the most informative reports for the management team—job costing, process costing, direct cost costing, activity-based costing, direct costing, throughput costing, and so on (chapters 9 through 18). For example, direct costing can be used for an internal report that focuses specifically on activities in the extreme short term, where there is no impact associated with overhead costs. Alternatively, a report can be based on throughput costs if the issue is how to push the correct product mix through a bottleneck operation in order to derive the highest possible profit. Further, full-absorption costing can be used for reports that focus on long-term decisions. The accounting method can therefore be precisely tailored to the use to which the report will be put. The format and content of internal reports can also vary substantially from the format used for external reporting. External report formats are precisely defined by GAAP: Revenues and costs are categorized in a specific manner and only a certain number of reports are allowed. None of these rules apply to internal reporting. Some examples of different reporting structures include:

Corporate-level reports. These reports may include only trend lines of information about a few critical success factors that senior managers are most interested in influencing, bottom-line profits and return on assets for each production facility or store, and perhaps forecasts at the product line level. The exact format used varies not only by company but also over time within each company, as different reporting items become less or more important to the...
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