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What is cost accounting?
Cost accounting consists of the identification, measurement, collection, analysis, preparation, and communication of financial information. Cost accounting, sometimes also referred to as managerial accounting, helps provide financial information used to:
I. Equip managers for decision-making
II. Improve a manager’s ability to make decisions
III. Control and manage resources.
The Need for Cost Accounting
This can be described as the process of accumulating, measuring, analyzing, interpreting and reporting cost information that is both useful and relevant to the internal and external stakeholders of a business entity. External stakeholders are those who have a vested financial interest in a business or company. For example banks (loans), financial houses (mortgages), investors (investments), etc. Internal stakeholders are the business or company directors, managers, division heads, etc.
Access to affordable health care has become a much more difficult goal to achieve than ever before. Cost accounting can be a useful tool for managers as they deal with the challenges of reduced donor funding, competition from other health service providers, increasing costs of service delivery, and, often, increased poverty within the communities they serve.
One of the many benefits of cost accounting is that it turns data into information, knowledge and wisdom about a business entity’s operations that is useful for:
I. Measuring performance
II. Reducing or managing costs
III.Determining the fees or prices for goods and services
IV.Deciding to authorize, modify or discontinue a program or activity
Decision Making
Cost accounting serves the decision-making needs of managers and facilitates the management process inside an organization. Management processes comprise four major activities.
I. Planning: A business plan revolves around the strategic aspects of a project and is intended to allow the project manager and core team make intelligent and educated day-to-day decisions by helping organize and put in place a series of resources commensurate with the objective to be achieved. Traditionally, business plans were not included in the typical project to-do list? Regardless of this unfortunate antecedent, experts in the field of project management who have practiced and taught this discipline for many years strongly recommend including a business plan when setting the basis for a newly assigned project. Cost accounting can provide long- and short-term planning tools for financial forecasting, budgeting, pricing decisions, cost-volume-profit analysis, break-even analysis and more.
II. Disorganization and Implementation: Implementation plan to indicators of success if the plan is not being followed as expected, then consider: Was the plan realistic? Are there sufficient resources to accomplish the plan on schedule? Should more priority be placed on various aspects of the plan? Should the plan be changed?
Much of what managers and supervisors do is solve problems and make decisions. New managers and supervisors, in particular, often make solve problems and decisions by reacting to them. They are “under the gun”, stressed and very short for time. Consequently, when they encounter a new problem or decision they must make, they react with a decision that seemed to work before. It’s easy with this approach to get stuck in a circle of solving the same problem over and over again. Therefore, as a new manager or supervisor, Cost accounting helps managers quantify their resources in order to implement their plans.
III. Control: Determined variety from among a set of alternatives in light of a given object. Decision-making is not a disconnect function of management. In actuality, decision-making is entangled with the other functions, such as Planning, Coordinating, and Controlling. These functions all necessitate that decisions be made. For example, at the outset, management must make a critical decision as to which of numerous strategies would be followed. Such a decision is often called a strategic decision because of its long-term impact on the organization. Also, managers must make scores of lesser decisions, tactical and operational, all of which are significant to the organization’s well-being. Cost accounting provides data for comparing performance against set targets. This response information is used to assess, correct, and therefore, control operations.
IV. Leadership and Communication: Decisions are at the heart of leader success, and at times there are critical moments when they can be difficult, perplexing, and nerve-racking. However, the boldest decisions are the safest. This source provides useful and practical guidance for making efficient and effective decisions in both public and private life. Nothing succeeds a success better than another sweet success. Cost accounting has a major role in promoting leadership and communication. Cost control techniques provide information that can be shared within an organization to provide direction to all.
Cost Accounting Utilized
All accounting systems are designed to provide information to people who take decisions. Either way, it is desirable to classify accounting systems based in the primary user of the information. Investor’s creditors, government agencies, tax authorities and others are outside the organization. Managers are within the organization. The classification of accounting systems in financial and cost systems capital this distinction between the people making decisions. Cost accounting can be used to answer numerous types of questions. Here are some examples:
I. How many patients can we treat before we run out of money?
II.where is the best position to cut costs?
II.which values do accuse for our yield or services in order to convalesce call our costs?
IV.if we have dissimilar prices for dissimilar services, what amalgamation of products or services provides the furthermost economic benefit to the workshop?
V.What is the most gainful service delivery technique? Should we stress static workshop or mobile workshop?
The extensive assortment of questions that can be answered with cost accounting information fall under three common areas of decision-making:
01. Cost control: Finally, Cost control and cost reduction are the most pressing issues facing the health care industry. Rising costs, coupled with decreased funding from government and other funding agencies, force health programs to examine their operations to identify how costs can be reduced.
During the execution of a project, procedures for project control and record keeping become indispensable tools to managers and other participants in the construction process. These tools serve the dual purpose of recording the financial transactions that occur as well as giving managers an indication of the progress and problems associated with a project. The problems of project control are aptly summed up in an old definition of a project as “any collection of vaguely related activities that are ninety percent complete, over budget and late. The task of project control systems is to give a fair indication of the existence and the extent of such problems.
02. Program funding: A contract is a legally binding agreement between one or more sponsors and the terms of the agreement outline specific goals and requirements for goods and/or services to be provided to the sponsor by the organizations. It is routine for these goods or services to be provided on a specific schedule. The relationship between the sponsor and the organizations is one of procurement. This type of arrangement is not considered for public use but for the direct benefit or use of the sponsor. Cost reduction efforts can lead workshop to reduce sometimes dramatically the range of health services they offer. Management must prioritize, focusing on the services that can be supported with less money. Cost accounting is an important tool for making decisions about whether to continue a program or discontinue it.
03. Pricing: The main cost essentials acceptable in the pricing of non-competitive government contracts are outlined in the Government Accounting Conventions (GAC). They include a Direct (Prime) cost that is Direct Labour, Direct Material and Direct Expenses (subcontracts and bought-out). In health care organizations, pricing involves calculating the cost of individual procedures and setting an acceptable price for a given service (or package of services). Evaluating price against costs is essential even when the price is not intended to fully cover the costs. In addition to cost, other factors must be considered in setting a suitable price for a service. These include:
I. Prices exciting by other health care providers for analogous services
II effortlessness of administering the price charged: for example, one may choose to round up or down all prices to the nearest to make the arithmetic easier for cashiers and supervisors
III. Introductory offers to popularize a service in the society: preliminary offers help clinics increase their penetration of the target market and provide opportunities to sell other services as well
Conclusion: Cost accounting information is designed for managers. Since managers are taking decisions only for their own organization, there is no need for the information to be comparable to similar information from other organizations. Instead, the important criterion is that the information must be relevant to decisions that managers operating in a particular environment of business including strategy make. Cost accounting information is commonly used in financial accounting information, but first concentrating in its use by managers to make decisions
