Design of a Cost System Why is the design of a cost system so much more complicated today than it was when cost accounting was in its infancy? Submission Instructions: Any written explanations should

Design of a Cost System

Why is the design of a cost system so much more complicated today than it was when cost accounting was in its infancy?

Submission Instructions:

• Any written explanations should use complete sentences, and appropriate grammar, punctuation, spelling and word usage.
• Your initial post should be at 200-300 words,formatted and cited in current APA style with support from at least 2 academic sources. Your initial post is worth 8 points.
• You should respond to at least two of your peers by extending, refuting/correcting, or adding additional nuance to their posts.Your reply posts are worth 2 points (1 point per response.)
• All replies must be constructive and use literature where possible.

Post by classmate 1

Why is the design of a cost system so much more complicated today than it was when cost accounting was in its infancy?

One of the most critical elements of a profitable company is to have a cost accounting system in place that is the roadmap to correlate product cost to profitability to include inventory valuation and cost control. The two main components of a cost system is job order costing and process costing. This information is essential as it summarizes to a firm those products that are profitable or less profitable to the organization. This information provides a framework for “estimating the closing value of materials inventory, work-in-progress and finished goods inventory for the purpose of financial statement preparation.”(xplained n.d.) The benefits of cost accounting is that it provides managers with both variable costs and invariable costs to internally assist managers with making accurate decisions. Today’s marketplace make it more difficult to develop an accurate cost accounting system from its infancy.

The roots of cost accounting trace back to the 1890’s, back then costs were straight forward as materials were sourced locally and direct labor was a major component of cost accounting. In today’s marketplace we are a global economy and this creates inherent problems. Direct labor has been replaced with automation and this in turn has created the need for engineers and employees who must manage the efficiencies and inefficiencies of the equipment and the software, couple that with tighter margins due to international competition and getting a true pulse of profitability can be a shot in the dark. Take for example, Ford may have a bolt that is manufactured in China that is used in an initial assembly facility in Mexico that has a finished assembly in Kentucky. So it may be easy to assess the cost of that bolt on a granular level but put that in the big picture of thousands of parts for multiple vehicle models and it is a daunting tax to determine the cost accounting for profitability.” increased automation.When direct labor is used as an allocation base, the introduction of automated production processes such as flexible machining systems can cause the system to fail. The new machinery uses less direct labor but usually requires more support for programming and engineering. Products made through automation tend not to be charged enough overhead, while products manufactured conventionally are charged too much.”(Harvard Business Review 1989)

So while the cost accounting methods of the past are obsolete, today’s market are more complex and in turn more difficult to build the proper framework of an accurate cost system. Building these systems can be expensive and time consuming.

References

Anthony, R., Hawkins, D. Merchant, K. (2011) Accounting: Text and Cases. New York: McGraw-Hill Irwin

Cooper, R. (1989) You Need a New Cost System When, The Harvard Business Review

Retrieved from: https://hbr.org/1989/01/you-need-a-new-cost-system-when(Links to an external site.)

N.A. Cost Accounting systems Retrieved from:

https://xplaind.com/360325/cost-systems(Links to an external site.)

Tuovila, A. (2020 Jan 8), Cost Accounting Investopedia Retreived From:

https://www.investopedia.com/terms/c/cost-accounting.asp

Post by classmate 2

The purpose of a costing system is to monitor the costsincurred by a business. The system comprises a set of forms, processes, controls, and reports that are designed to aggregate and report to management about revenues, costs, and profitability. The information issued by a costing system is used by management to fine-tune operations that will help generate higher profitability, decide where to cut costs in the event of a business downturn, match actual costs incurred against budgeted cost levels for control purposes and create strategic and tactical plans for future operations. (Bragg,2018).

In a cost accounting system, cost allocation is carried out based on either a traditional costing system or activity-based costing system. Traditional costing systemcalculates a single overhead rate and applies it to each job or in each department and Activity-based costing, on the other hand, involves calculation of activity rate and application of overhead costs to products based on their respective activity usage.

An intelligent cost system design is one that is simple while still providing managers with information they need to make decisions. As most manufacturing processes were labor intensive at the turn of the century, a majority of cost management systems relied on direct labor to assign indirect costs to products and services. Indirect or overhead costs are costs that are associated with or caused by two or more operating activities jointly but are not traceable to each of them individually. Direct costs, on the other hand, are specifically traceable to or caused by a specific project or production operation.

The design of a cost system is more complicated today than it was when cost accounting first began. The changes in how business is performed and its environment are part of this significant shift in its complexity. When cost systems first began to take shape, the priority and focus was on the manufacturing cost and the allocation of indirect manufacturing costs for a product or service. Because of technology and the continuous change in customer preferences poses a real challenge for manufacturing companies today, making the original cost system a thing of the past.

Due to the changes, businesses focus on designing a cost system that will help them identify potential areas that can bring in possible cost savings. Hence, the focus on cost rationalization and cost reduction. Although manufacturing companies cannot control or regulate the market prices of their goods, they can control their costs and that is what today’s design of the cost system takes into account.

References:

Anthony, R. N., Hawkins, D. F., & Merchant, K. A. (2011). Accounting: Text and cases 13th edition. New York: McGraw­Hill/Irwin.

Cooper, R., & Slagmulder, R. (1999). Intelligent cost system design. Strategic Finance, 80(12), 18-20.

Steven, Bragg. (Jan 5, 2018). Costing System. Retrieved from: https://www.accountingtools.com/articles/what-is-a-costing-system.html