What Is Cost Management Accounting Reporting Systems
Cost Accounting Reporting System deals with the process of tracking, measuring, recording and classifying the appropriate allocation of expenditure (financial and non-financial) for the determination of the cost of product or service in an organization and for the presentation of suitably arranged data for the purpose of control and guidance of management (Horngren et al, 2010). Costs are measured in terms of Direct Costs, Indirect Costs and Overhead/Absorbed Costs. Managers use cost accounting to support decision making to reduce a company’s costs of products and services and improve its profitability.
Management Accounting Reporting System is concerned with the process of identification, measurement, accumulation, analysis, preparation, interpretation and communication of financial and non- financial information used by managers to plan, evaluate and control within an entity and to assure appropriate use of and accountability for its resources to managers within organizations, to provide them with the basis in making informed business decisions that would allow them to be better equipped in their management and control functions thereby enhancing both customer and shareholder value (CIMA, 2010).
Unlike financial accounting information, management accounting information is used within an organization typically for decision-making in varied areas like product design, production,marketing, and performance management. Management accounting systems also do not have to follow set principles and rules and is usually confidential and its access available only to a select few. Cost Accounting operates within the parameters of Management Accounting. As businesses became more complex and diversified, a more comprehensive reporting system was needed in order to help management make decisions.
Modern cost accounting systems take the perspective that collecting cost information is a function of the management decisions being made. Thus it can be safely understood that Management Accounting evolved from Cost Accounting. Hence, the distinction between management accounting and cost accounting is not so well-defined and the terms are used interchangeably (Horngren et al, 2010). Management Accounting principles are also used in other accounting related functions such as Long Term Planning (LTP), budgeting and forecasting revenue and profit planning. Again, cost accounting data is used as an integral part of the process.
Management Accounting Reporting Systems: Necessity & Role Value creation is the fundamental focal point for the managers in an organisation across diverse sectors (Smith, 2010). Value creation refers to both customer and shareholders. Creating customer value has been a key concern for the organizations but only in recent years have the managers come to recognize the importance of understanding the customer value – the value that a customer places on particular features of a product and satisfying customers is critical to achieving increased sales and market share and therefore to achieve the shareholder value (Smith, 2010).
Shareholder value is also a key focus area for the managers and involves improving the net worth of the business for the shareholders/owners of the company. From a shareholders’/owners’ perspective, parameters like increased profits, share value and dividends are extremely important and management is charged with the responsibility of delivering on all the parameters. To enhance customer or shareholder value, managers need to understand what drives value. They have to make decisions and invest resources in the activities or aspects of their business that lead to improvements in customer and shareholder values.
The effective and efficient use of resources is essential to creating value to customers and shareholders; and Management Accounting Reporting System provides the much needed critical information to assist managers to perform this role (Smith, 2010). Management Accounting System supports the organisation’s planning and implementation of strategy. The strategic planning of an organisation specifies the direction (type of businesses and markets to enter and how to compete in the market) that the organisation intends to take over the long-term to meet its objectives.
Strategic planning draws on a wide range of management accounting information from costing, budgeting, performance measurement systems, as well as information from analytical studies, both external and internal to the organisation (Smith, 2010). The implementation of the strategy requires management accounting system link the long term plans to the budgeting system, to produce annual budgets that supports the2 organisation’s strategies.
Performance Measurement Systems which forms a part of the management accounting system can be used to compare actual outcomes to budgets and other targets that focus on the organisation’s trategic objectives (Smith, 2010). With cut-throat competition in the market-place, well managed organisations focus their objectives and strategies on building and maintaining sources of competitive advantage. Thus Management Accounting Systems contributes to improving the organisation’s competitive advantage in terms of quality, delivery time, flexibility, innovation and cost through modern process improvement and cost management techniques.
It also provides information to help manage resources, through systems for planning (e. g. budgets) and control (e. g. performance measures). Furthermore, Management Accounting System also provides estimates of the costs of the organisation’s output – goods and services, to support both the strategic and operational decision needs of managers. Cost Accounting Reporting System on a standalone basis helps the organisation in ascertaining the cost of the product, job or services.
The reporting system provides detailed information about the composition of total cost for determining the selling price of the product or service under different conditions. Fully developed cost accounting system provides ready information regarding stock of raw material, work-in-progress and finished goods and also facilitates in the preparation of financial and other statements at such intervals as desired by the management. Cost accounting reporting system also helps in measuring and further increasing the efficiency of the organization (Horngren et al, 2010).
This process involves a study of the processes and procedures used in manufacturing or providing goods or services to measure the efficiency of the organisation or departments and devising means of increasing the efficiency. Thus, the cost accounting information becomes the basis of formulating forward-looking operative policies. The Cost accounting information is also used to control and reduce cost and hence increasing the profits thereby increasing the customer and shareholder value (Smith, 2010).
The techniques that are used for controlling cost are budgetary control and standard costing methods. The cost accounting information makes possible for the management to distinguish between profitable and unprofitable operations. Concentrating on profitable operations and eliminating non-profitable ones can maximize profit. This information also helps in eliminating wasteful expenditure of resources at various levels and will help the management in forming future course of action.
Compared to other supportive reporting systems like Financial Accounting System, which provides information about the financial position and past performance of an organization on an annual or quarterly basis to investors, banks, regulators and other outside parties, Cost and Management Accounting Systems can provide information on a short and long term basis which can be past, present and future oriented and can satisfy the short and long term decision making needs of the management towards fulfilling the organizational goals (Horngren et al, 2010).
The factors that contribute towards fulfilling the organizational goal of increasing profits and shareholder wealth like information for planning and controlling operations, estimates of cost of producing goods and services efficiently; and information for measuring performance can also be provided by Management Accounting Systems. Financial Accounting Reports has to follow very strict guidelines and protocol in its compilation and final presentation form.
These norms and guidelines are internationally accepted and implemented while Management Accounting reports are for internal use of management for decision making and may not be completely objective and verifiable but is relevant to the issue at hand (Horngren et al, 2010). Moreover, Financial Accounting reports on the business or company in its entirety, i. e.
Financial Accounting reports show the overall picture of a businesses financial position for a certain reporting period and are not concerned with any particular department of the organisation while Management Accounting reports’ primary emphasis is on segment reporting (Smith, 2010). It deals with the various segments like product lines, departments or any other categorization of the company’s activities that management finds useful and is not governed by generally accepted accounting principles. Conclusion
In a nutshell, there is a tremendous necessity for management and cost accounting reporting systems in an organisation, not only for achieving the predetermined goals and remain profitable, but also to create value to both customers and shareholders. Since the complexities of running an organisation has increased due to complicated market systems and increased competition, there is a need for the management accounting reporting system to be brought under a common control framework for the effective function of the system and helping the organisation to proactively reduce cost and bring profitability.