A Cost Accounting System Analysis - 1046 Words

A cost accounting system is a framework used by firms to estimate the cost of their products for profitability analysis, inventory valuation and cost control. Its goal is to advise the management on the most appropriate course of action based on the cost efficiency and capability. Cost accounting provides the detailed cost information that management needs to control current operations and plan for the future. Costing is essential for every organization, as every manufacturing and other department has to be assigned accurate budget for proper operation (Hansen, Mowen and Guan, 2006). The costing system provides information that is useful to managers for minimizing wastage and allocating resources to different departments. The traditional†¦show more content†¦Most organizations in the business arena today are quite complex, large and have many departments. It cannot be the basis of the costing system in these organizations as it can only be efficient when there are low indirect costs compared to direct costs. On the other hand, Activity-based costing (ABC) attempts to accurately trace indirect costs to products by allocating indirect costs to activities and then to products based on their usage of the activities. In order to counter the flaws of the Traditional Costing System, most organizations have adopted the ABC method. ABC is an effective way to allocate the indirect costs and it leads to more accuracy because it relies upon a greater number of activity and resource cost drivers rather than only focusing on volume based cost drivers. Also in contrast to the traditional costing system, ABC is optimal when indirect costs are higher as it utilizes several indirect cost pools and divides the production function into many activity areas. The activity based approach provides a precise breakdown of indirect costs and eliminates the allocation of irrelevant costs to a product therefore providing a more exact reflection of product and customer profitability. Thus, unlike traditional costing, ABC gives equal importance to other factors such as business competition, accuracy, customer satisfaction, product development etc. It’s emphasis on product efficiency helps the company establish aShow MoreRelatedManagement Accounting : The Father Of Accounting1415 Words   |  6 PagesIntroduction Accounting has be defined in various ways however almost every definition will describe it as a process that identifies, measures, analysis, and report data. Management accounting has not been the same since business started; it has come a long way from early member of civilisation using stone tablets for bookkeeping. 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