Accounting Important Success Firm? What Methods Cost

¶ … accounting important success firm? What methods cost accounting ? The paper (a) identify main issues chosen area, (b) reference learning occurred, (c) build class activities incidents facilitated learning understanding, (d) present specific current / future applications relevance typical workplace.

Cost accounting -- definition, importance, methods

The modern day society is constantly presenting the economic agent with more numerous and more pressing challenges. In order to face them and emerge as a competitive institution, firms develop and implement a wide array of strategies, such as creating customer value, developing the skills of the staff members, establishing strategic partnerships or creating financial stability and accountability. One specific means in this endeavor is represented by cost accounting, which represents a key to organizational success. The current project focuses on the identification of the reasons as to why cost accounting is important to organizational success. A secondary research objective is that of pin pointing several methods of cost accounting and revealing the means in which they are used.

The first step in attaining the previously mentioned research objectives is that of ensuring a clear and full comprehension of the concept of cost accounting. With this objective in mind, the following lines reveal some of the definitions as they occur in the specialized literature:

Finance specialized website Investopedia (2010) defines cost accounting as "a type of accounting process that aims to capture a company's costs of production by assessing the input costs of each step of production as well as fixed costs such as depreciation of capital equipment." The editors continue to explain that cost accounting commences by individually assessing and recoding the totality of costs incurred and then comparing them to the final output, in order to reveal a true picture of the company's financial performance.

The Accounting for Management website (2009) defines cost accounting as "the process of accounting for cost, which begins with regarding and classifying of incomes and expenditures and ends with the preparation of periodical statements and reports for ascertaining and controlling costs."

The main usage of cost accounting is that of supporting the organizational managers in making informed decisions regarding budgeting, investments or organizational cost control programs. Nevertheless, in spite of its internal application, cost accounting is often important to the outside community of investors, as they use the technique to assess the firm's profitability levels, as well as its assets and liabilities. In other words, the importance of cost accounting to firm success is pegged to the following:

Cost accounting helps identify and seize profitable investments projects

Cost accounting helps identify and remove costly and non-profitable investments

Cost accounting support the financial stability of the firm

Cost accounting identifies and helps resolve costly issues at various stages of the business operations

Cost accounting helps the managers identify potential costs when changes would be introduced within the business model

Cost accounting insures financial transparency and creates investor trust

Cost accounting attracts more investors and as such leads to opportunities for increases in the firm's capitals.

In terms of the methods of cost accounting, these refer primarily to the following:

The traditional method of cost accounting

Job costing

Batch costing

Activity-based costing

a) Traditional method of cost accounting

The traditional method of cost accounting revolves around the allocation of manufacturing overhead to the totality of items manufactured. In the words of Harold Averkamp, "the traditional method (also known as the conventional method) assigns or allocates the factory's indirect costs to the items manufactured on the basis of volume such as the number of units produced, the direct labor hours, or the production machine hours."

b) Job costing

The job costing accounting technique is characterized by the fact that it focuses on the individual processes integrated in the creation of a specific product. In this order of ideas, job costing strives to identify each individual job process integrated in the manufacturing of the final item and to follow it through the totality of the production stages. It as such reveals the costs of that job as it passes through the specific manufacturing stages (Pizzey, 1989).

c) Batch costing

Batch costing commences at the premises that products of similar types can be organized in batches of that product and the costs of manufacturing the respective items would be computed relative to the batch, rather than relative to the single, individual products. Batch costing is similar to individual product costing in the meaning that the incurred costs are assessed and costing conclusions are formed, but they relate to the batch, rather than to the single product (Pizzey, 1989).

d) Activity-based costing

Activity-based costing is the most common form of cost accounting and it commences at the premises that each product is the result of several organizational activities. The process as such "first assigns costs to the activities that are the real cause of the overhead. It then assigns the cost of those activities only to the products that are actually demanding the activities" (Accounting Coach, 2010).