Cost Accounting

 Cost accounting information is designed for managers.  My cost accounting course is best for students and CPA exam candidates.

Cost Accounting Course

Cost Accounting Course

 Because the managers are making decisions only for their own organization, there is no need for the information to be comparable to similar information in other organizations.

Instead, the important criterion is that the information be relevant for the decisions that managers operating in a particular business environment with a particular strategy make. Cost accounting information is commonly used in developing financial accounting information, but we are concerned primarily with its use by managers to make decisions.

The primary purpose of financial accounting is to provide investors (for example, shareholders) or creditors (for example, banks) information regarding company and management performance. The financial data prepared for this purpose are governed by generally accepted accounting principles (GAAP) in the United States and international financial reporting standards (IFRS) in many other countries. GAAP and IFRS provide consistency in the accounting data used for reporting purposes from one company to the next. This means that the cost accounting information used to compute cost of goods sold, inventory values, and other financial accounting information used for external reporting must be prepared in accordance with GAAP or IFRS. Although GAAP and IFRS are converging, differences remain. For the reasons discussed in the next paragraph, these differences are not important for our discussion, but you should remain aware of them.

In contrast to cost data for financial reporting to shareholders, cost data for managerial use (that is, within the organization) need not comply with GAAP or IFRS. Management is free to set its own definitions for cost information. Indeed, the accounting data used for external reporting are often entirely inappropriate for managerial decision making. For example, managerial decisions deal with the future, so estimates of future costs are more valuable for decision making than are the historical and current costs that are reported externally. Unless we state otherwise, we assume that the cost information is being developed for internal use by managers and does not have to comply with GAAP or IFRS.

This does not mean there is no “right” or “wrong” way to account for costs. It does mean that the best, or correct, accounting for costs is the method that provides relevant information to the decision maker so that he or she can make the best decision.

Customers of Cost Accounting

To management, customers are the most important participants in a business. Without customers, the organization loses its ability and its reason to exist; customers provide the organization’s focus. There are fewer and fewer markets in which managers can assume that they face little or no competition for the customer’s patronage.

Cost information itself is a product with its own customers. The customers are managers. At the production level, where products are assembled or services are performed, information is needed to control and improve operations. This information is provided frequently and is used to track the efficiency of the activities being performed. For example, if the average defect rate is 1 percent in a manufacturing process and data from the cost accounting system indicate a defect rate of 2 percent on the previous day, shop-floor employees would use this information to identify what caused the defect rate to increase and to correct the problem.

Many proponents of improvements in business have been highly critical of cost accounting practices in companies. Many of the criticisms—which we discuss throughout the book—are warranted. The problem, however, is more with the misuse of cost accounting information, not the information itself. The most serious problems with accounting systems appear to occur when managers attempt to use accounting information that was developed for external reporting for decision making. Making decisions often requires different information from that provided in financial statements to shareholders. It is important that companies realize that different uses of accounting information require different types of accounting information.