Cost Accounting and Management Decision Making

To provide the financial information needed, accounting forms a basic priority for decision-makers. Developing a new technology in an industry is to depends on the accounting information, particularly decisions of investment, products introduced, money depts. from banks, At every customer contact, the quality of a decision makes the success of a business.

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Decisions concerning the interests of the customer, value, and risk to the business play a major role to reflect the business strategy and are called decision management.

One of the active decision management offerings is Chordiant Decision Management which has proven not only to help make better businesses decisions but also to have those decisions in each customer contact implemented and monitor the results, This ultimately ensures a far more responsive, customer-focused, and successful business.

To be able to manage without special internal cost information is only possible in very small companies in which one person can store and analyze any relevant information, and take the important decisions. Shareholders, tax authorities are some of the figures that are normally produced by financial accounting for outsiders.

On the other hand, management requires different information if talking about larger NIS companies operating in a competitive marketplace, however; such information needs to be supplied from outsiders both as a basis for decisions to be taken, clearly and economically communicated those at all levels in the company. So providing an orientated information of a decision is the task of management accounting that is called cost accounting. Accurate basis of management accounting is very much relevant to the costing of the products of the company, many Several methods are used to achieve costing, depending on various objectives of management decisions, so They basically are financial accounting and management (or cost) accounting.

The cost accounting was established basically to emphasize the real cost of all operations done, processes, and the analysis of variances, profitability, or social use of funds, departments, or products. A lot of Mangers used Cost accounting to support decision-making, decrease the cost of the company and increase company profits.

Standards include GAAP should not be followed by cost accounting, because it is considered as a form of management accounting, internal managers are its primary use rather than external users, but what to compute is instead decided pragmatically, in favor of paying on an hourly rate, the practice of paying workers on a ‘set-piece’ basis changed. Most of the modern companies should have truly low variable costs such as (primarily raw material, commissions or casual workers) and also should have very high fixed costs (worker salaries, engineering costs, quality control, etc.), Accordingly, standards of cost accounting lost its usefulness for management decision making due to a variety of reasons :

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  • Equipment has become more complex and specialized and maybe a very significant proportion of total costs
  • Swings in profitability resulted from changes in the level of full cost inventory care difficult to explain or understand, The increase in companies inventory can decrease costs of productivity and increase profits, while a decrease in inventory level will decrease profits
  • wide range of products organizations or services have processes that are common to several finished items, making cost allocation irrelevant or misleading

Managers and experts usually use cost accounting are intrinsical to help them in knowing the costs of all business done and all that must be done, in the industrial revolution days, modern cost accounting began to appear, but the complexity in running a large amount of business led to developing all recording and tracking costs system to help business owners and managers make decisions.

And during the early industrial age, all costs incurred by mangers and business is called by modern accountants “variable costs”, they called it variable costs because it is not state and it is changed and varied automatically with the amount of production, the labor, power to run a factory, raw materials, were expenses of money, and also in direct proportion to production, mangers can use the variable costs of the product and can simply total it as a rough guide for process’ decision making.

Product pricing constitutes the central tool of cost accounting for management decisions that are not regulated by law, The variable costs for a product form the primary purpose of cost accounting, in order to set the selling price of the products.

Physical flows are the core elements of environmental information systems, that are found in physical units of material, water, and energy within a defined system boundary. On the corporate level, this can be and at the level of cost centers and production processes, and even at the level of specific equipment and products. In order to provide a basis for increasing production efficiency EMA combines that physical flow information with data from financial accounting and cost accounting, EMA can be used by private or public corporations or other organizations. It is not applicable at the national level.

In recognition of all that, visibility for individual operating costs and business returns is a serious demand. Decision-making, planning is central to management accounting and to the control of the processes that convert production costs into operating profits. Timely and accurate information to the decision-maker is urgent no matter how diverse the task or at what management level.

Modules of a high degree of integration offer decisions of feasible alternatives to be weighed according to their impact upon all areas of the business. Accordingly, sales forecasting, as well as the creation of production program schedules, can be applied, such As, for example, services performed by various departments(cost centers) involving in the manufacturing process have their cost allocated automatically, in which every stage can be completed and to the activity base(cost driver) costs are incurred as a result so the cost center accounts are accordingly credited.

A highly flexible design that supports a variety of theoretical and practical cost management models forms the underpinning of the object-oriented structure, Regardless of the branch of business activity, organizations are intrinsically in need of the management accounting system, The manufacturing, retail or, service industries sector that business is engaged in finding an excellent match, in fact.

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To make the best decisions, individuals, corporations, and governments need to weigh the relative benefits accurately and estimate costs of various alternatives, A decision to purchase a home, for instance, involves a comparison of the positive and negative aspects of each potential site, Such comparison gives the ability to choose the home that meets a household’s needs at a price affordable.

The same process is followed in business; when it is decided on new production processes for a factory location, Choices sometimes affect others resulting in conflict, For example, when the smokestack emissions from a new factory soil laundry drying on the clotheslines of neighboring households. To replace the soiled clothes or purchase dryers for the affected households may require the business to relocate elsewhere. On the other hand, knowing of the nearby factory with damaging emissions leads a household pick a different place to live.

In such case, the identification of the responsible party is to be considered a legal question. This example shows how difficult it is to make a decision satisfying particularly in the condition of having an absence of information on the benefits of the choices that are a relevant and full range of costs.

Full cost accounting is generally a term that referred to the process of having the information collected and presented to decision-makers to undertake each proposed alternative on the trade-offs inherent. Government agencies are in continuous need of such process, However, it represents a variety of interests associated with decisions of the allocation of public funds and/or natural resources.

Finally, among the various cost accounting tasks the only common denominator is the focus on providing information for management decision making, the task is to have a short analysis of a specialized topic conducted, conclusions drawn, and recommendations made acted on by management to make improvements. So we may conclude that the responsibility here is great, for the cost accountant’s recommendations ultimately have a direct impact on company operations and overall profitability.

Works cited

Villiers (2007), What is Cost Accounting?.

Koovappadi (2007), Lean Manufacturing And Cost Accounting.

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Gary (2006) , Discusses Effective Decision Making and Clinical decision making.

Winthorp (2007) Organizational Decision Making Is A Strategic Process.

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