Cost Accounting as a Sinequanon of Production of Company’s Survival

INTRODUCTION

Cost Accounting is a branch of accounting and has been developed due to limitations of financial accounting. Financial accounting is primarily concerned with record keeping directed towards the preparation of Profit and Loss Account and Balance Sheet. It provides information regarding the profit and loss that the business enterprise is making and also its financial position on a particular date. The financial accounting reports help the management to control in a general way the various functions of the business but it fails to give detailed reports on the efficiency of various divisions. In the new economy, managing risk and capturing costs have never been more critical for business survival in today’s embattled construction industry.

But for those business owners and operators who truly understand and adhere to the time-honored principles of cost accounting, it is their construction firms that will weather the recent storms and emerge far ahead of their competitors as the economy turns toward better days.

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THE ‘INDIRECT COSTS’ OF DOING BUSINESS

Indirect costs involve such line items as health insurance, depreciation, and building rent. As such, these expenses are difficult to apply directly to a job estimate. However, there are definitely some indirect costs that can justifiably be tied to a job – such as uniforms, vehicle fuel costs, equipment maintenance and repairs. Instead of listing these expenses individually, the smarter practice is to group them into an “indirect cost pool” that can be allocated by a certain percentage to each job. If you haven’t done so, the best place to start is to examine your previous year’s financial statements. Identify your pool of indirect costs that were most closely associated to performing specific jobs, then include those calculations in your current budget and job estimating. Going forward, it will be important to examine this cost pool at least every quarter, if not monthly, to remain on track and as accurate as possible.

With cost accounting, your overall business goal is to retain flexibility with your profit margin in the estimating and bidding process. Once you have established a ceiling on all costs required to perform a construction job, then you can begin to make more educated decisions in your estimates and bids. You can decide whether to increase your profit margin, or even forego it in other instances, without risking your overall bottom line.

GETTING A HANDLE ON COSTS

If your construction firm is growing but has remained tightly held and operated, it may be time to reach out for help. It’s not easy to conduct cost accounting all on your own. Here are a few ideas that may help:

•         One of the first steps you can take is to find a business mentor, someone who has been down your same road and is now operating a much larger construction firm, preferably outside your competitive market. Chances are that another business owner relied on outside advice as well to build their own successful business and would be happy to share their insights.

•         Partnering with an accountant or other business consultant with specific experience in the construction industry is also advisable.

•         As you work toward more accurate cost accounting, another initial step is to study your company’s organizational chart and consider hiring an operations manager with specific experience in growing or operating a larger construction firm.

•         Investing in greater automation through modular, integrated accounting software that is scalable to grow along with your company is another necessity toward honing your cost-accounting system.

•         Phasing in development of your cost-accounting structure is typically advisable, especially if you’re starting from scratch.

All of these steps require careful consideration and planning. But the desired outcome – learning to manage your profits as well as you manage your construction projects – will be most rewarding in the future growth and livelihood of your company and employees.

MAIN ADVANTAGES OF COST ACCOUNTING

Managers appreciate cost accounting because it can be adapted, tinkered with and implemented according to the changing needs of the business. Unlike static, Financial Accounting Standards Board (FASB)-driven financial accounting, cost accounting need only concern itself with internal eyes and internal purposes. Labor costs are easier to monitor and control through cost accounting. Depending on the nature of the business, wage expenses can be taken from orders, jobs, contracts, or departments and sub departments. This means management can pick and choose how it determines efficiency and productivity. This is very important when estimating marginal productivity of individual employees.

Cost accounting can be thought of as a sort of three-dimensional puzzle. Accounts, calculations and reports can be manipulated and viewed from different angles. Management can analyze information based on criteria that it values, which guides how prices are set, resources are distributed, capital is raised and risks are assumed. It's a crucial element in management discussion and analysis. Management of business, organization, and company or industry concerns expects from Cost Accounting a detailed cost information in respect of its operations to equip their executives with relevant information required for planning, scheduling, controlling and decision making. To be more specific, management expects from cost accounting - information and reports to help them in the discharge of the following functions:

(a) Control of material cost

Cost of material usually constitutes a substantial portion of the total cost of a product. Therefore, it is necessary to control it as far as possible. Such a control may be exercised by (i) Ensuring un-interrupted supply of material and spares for production. (ii) By avoiding excessive locking up of funds/capital in stocks of materials and stores. (iii) Also by the use of techniques like value analysis, standardization etc. to control material cost.

(b) Control of labour cost

It can be controlled if workers complete their work within the standard time limit. Reduction of labour turnover and idle time too help us, to control labour cost.

 (c) Control of overheads

Overheads consists of indirect expenses which are incurred in the factory, office and sales department ; they are part of production and sales cost. Such expenses may be controlled by keeping a strict check over them.

(d) Measuring efficiency

For measuring efficiency, Cost Accounting department should provide information about standards and actual performance of the concerned activity.

(e) Budgeting

Now-a-days detailed estimates in terms of quantities and amounts At* drawn up before the start of each activity. This is done to ensured that a practicable course of action can be chalked out and the actual performance corresponds with the estimated or budgeted performance. The preparation of the budget is the function of Costing Department.

(f) Price determination

Cost accounts should provide information, which enables the management to fix remunerative selling prices for various items of products and services in different circumstances.

(g) Curtailment of loss during the off-season

Cost Accounting can also provide information, which may enable reduction of overhead, by utilizing idle capacity during the off-season or by lengthening the season.

(h) Expansion:

Cost Accounts may provide estimates of production of various levels on the basis of which the management may be able to formulate its approach to expansion.

(i) Arriving at decisions

Most of the decisions in a business undertaking involve correct statements of the likely effect on profits. Cost Accounts are of vital help in this respect. In fact, without proper cost accounting, decision would be like taking a jump in the dark, such as when production of a product is stopped.

Role of Costing and Cost Accounting in the Organization

Purposes of Accounting Systems

Accounting is a major means of helping managers of an organization, equity investors of an organization, potential equity investors, creditors and bond holders of an organization, potential creditors and bond holders of an organization, suppliers and customers of an organization and other stake holders to take decisions.

Accounting provides information for three major purposes:

1. External reporting: These reports are used investors, creditors, government authorities, and other outside parties.

2. Routine internal reporting: These reports which are periodically generated are used by managers of the company for their internal decisions.

3. Nonroutine internal reporting: This information or reports are generated to support projects and other decisions that come up as the need arises from them. While the reports are prepared in different formats and basic data is manipulated or summarized in various ways to facilitate decision making, there is one data base maintained by the accounting system that contains data in the form debits and credits to various accounts maintained in the accounting system. Accountants combine these data items in various ways to provide information to internal or external users.

CONCLUSION

In conclusion, for any business entity + from the smallest business enterprise to the largest multinational corporation + to be successful requires the use of cost accounting concepts and practices. %t provides key data to managers for planning and controlling, as well as costing products, services, and customers. The central focus is how It could help managers make better decisions. "Or this reason businesses and companies hire cost accountants and they are increasingly becoming integral members of decision making teams instead of -use data providers.

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REFERENCES

Cost Accounting - Horngren et al., Book Information and Review
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Duru, V.O. (1997).  The Performance of Oil-Mineral-Producing Areas Development Commission  (OMPADEC) in the Development of Delta State.

M.Sc. Project (unpublished); University of Benin City. Ekiyor, C. (2007). Explicit Interview with Emma Amaize.  Published in Sunday Vanguard July, 22.  p.4. Ibeanu, O. (2005).

 Maher, Lanen and Rahan, Fundamentals of Cost Accounting, 1st Edition (McGraw-Hill 2005).

Horngren, Datar and Foster, Cost Accounting - A Managerial Emphasis, 11th edition (Prentice Hall 2003).

Kaplan, Robert S. and Bruns, W. Accounting and Management: A Field Study Perspective (Harvard Business School Press, 1987) ISBN 0-87584-186-4