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Cost Accounting: The Missing Component of Supply Chain Management

One of the first questions I ask our Warehouse Management students is, “Do you know your operating costs?” and to our Production Planning Management students, “Do you know the cost to produce one of your items? ” After five years of training, I can count on one hand how many students were able to answer these questions, which tells me right away that your company does not use cost accounting.

The reason students cannot answer the question is that their company only has what is called financial and management accounting. Management accounting focuses on the management needs for historical and estimated data for ongoing operations and long-term planning. The purpose of management accounting is to accumulate financial information for use in making economic decisions.

Financial accounting focuses on collecting historical financial information for use in preparing financial statements that meet the needs of investors, creditors, and other external users of financial information. Statements include a balance sheet, an income statement, a statement of retained earnings, and a statement of cash flows. Although these financial statements are useful to both management and external users, additional reporting, schedules, and analysis are required for management to use in planning and controlling operations.

Financial accounting and management focus on the operations of the business as a whole and cannot provide the details needed to accurately determine product costs and prices. At best, all they can do is provide averages. In addition, cost accounting provides the detailed cost information management needs to control current operations and plan for the future. Management uses this information to decide how to allocate resources to the most efficient and profitable areas of the business.

Cost accounting allows management to properly allocate costs such as raw materials, labor, and other factory resources to the products actually used and then average them across all products. Without cost accounting, expenses such as major investments in physical assets, workforce development, depreciation, taxes, insurance, utilities, machine maintenance and repair, material handling, production setup, production scheduling, sales and Administrative expenses are generally grouped together to create an overall cost. A fee that is added to a product as a general markup. The true cost of a product is never determined, which means the company charges too much for some products and not enough for others.

Cost accounting principles have been developed to allow manufacturers to process the various costs associated with manufacturing and to provide integrated control functions. The information produced by a cost accounting system provides a basis for accurately determining product costs and selling prices, and helps management plan and control operations.

Determination of costs and prices of products

Cost accounting procedures provide the means to determine the costs of products that enable the preparation of meaningful financial statements and other reports necessary to run a business. The cost accounting information system should be designed to allow the determination of unit costs as well as the total costs of the product. Unit cost information is also useful for making important marketing decisions, such as determining the selling price of a product, dealing with competition, bidding for contracts, and analyzing profitability.

Planification and control

One of the most important aspects of cost accounting is the preparation of reports that management can use to plan and control operations. Planning is the process of setting objectives or goals for the business and determining the means by which they will be met. Effective planning is facilitated by clearly defined objectives of the manufacturing operation and a production plan that will help and guide the company in achieving its objectives.

Cost accounting information improves the planning process by providing historical costs that serve as the basis for future projections. Management can analyze the data to estimate future operating costs and results and make decisions about the acquisition of additional facilities, any changes in marketing strategies, and the availability of capital.

Effective control is achieved by assigning responsibility for each detail of the production plan through the establishment of cost centers. All managers must know precisely what their responsibilities are in terms of efficiency, operations, production, and costs. The key to proper control involves the use of responsibility accounting and cost centers, regularly measuring and comparing the results, and taking any necessary corrective action.