Cost accounting and reporting systems are vital in the process of financial budgeting and policy making to ensure accountability. Reporting systems are crucial indecision making by an organization and could be either internal or external. Internal reporting system creates financial reports that help in decision making within the organization. This system of financial reporting is not restricted to generally accepted accounting principles (GAAP).The cost accountant in this case can use any effective costing paradigm. Examples of internal financial reports may include corporate –level reports, business unit-level reports and function- level reports. External reporting provides financial information consumed outside the organization. This report in used by government for the purpose of taxation, the public and the shareholders. Reporting is normally done periodically i.e. after a financial year. In this method of reporting, accepted accounting principles are adhered to. Management and cost accounting practices raise a number of ethical issues that range from cost reimbursement, reporting to managerial decisions concerning the production process (Needles, 2010, p. 34).
Managerial accounting decision making
Decision making in management accounting involves choosing the best alternative from cost data and determining the cost of action to be taken. A good decision is the one that will minimize cost and maximize profit of a firm. Cost accountants have a duty of providing accurate information as pertains to the cost centers and hand this report to managers for decision-making. Decision making in cost accounting can be classified as long term and short term or strategic and tactical. The process of decision-making involves the following steps:
- Identify all alternatives available for the set decision.
- Analyze and evaluate the data.
- Implement the desired alternative.
- Evaluate results against standards
This paper is going to discuss factors that hinder effective management and cost accounting reporting which will include ethical and sustainable concepts in financial decision-making (Caplan & Landekich, 1971, p. 71).
Objectives of management and cost accounting reporting system
One of the major objectives of management and cost reporting system is to provide information for decision making by the organization. For instance, cost benefit analysis may be an effective tool by a manager to determine whether to continue with a project or dispose it. Managerial accounting facilitates creation of an organization’s budget and actual cost accumulated in particular process or department in a firm. Managers use cost accounting to cut on cost and maximize profit (Buchman, 1983, p. 48).
Factors affecting Cost Accounting Reporting for Management effective Decision Making
Ethical issues emerging from managerial and cost accounting encompass managerial decisions concerning production as well as cost allocation processes in an organization. Managerial and cost accounting reporting can be subjected to manipulation or unethical conduct and therefore communicate wrong information to the stakeholders. In discussion of the ethical perspective of management accounting reporting system, a number of major issues emerge. These issues are discussed in the next section.
Allocation of cost can be subject to unethical manipulation by the cost accountant. This comes about by intentionally changing cost amount so that a higher amount in revenue associated with cost area can be obtained. Firms with cost-based revenue are vulnerable to this kind of cost manipulation. This arbitrary change in cost with intention of profit amounts to unethical practice. Reporting of the inflated cost gives wrong information and may result to wrong decisions by the organization. Managers are driven to act this way because of the higher amount of cost based products than market products and therefore are often tempted to shift significant overheads costs to cost based products for their benefit (Hansen, 2007, p. 14).
In order to increase net income, managers sometime overproduce to lower unit cost, which will not be detected easily since fixed cost is a product cost factor. This way the manager will report increased profit to the firm, which may not be accurate enough due to the manipulation brought about by over production.
Estimating equivalent units
This is an estimation of work ending in percentage during process inventory. Managers may overestimate the percentage of completion to obtain lower unit cost. This is made possible by extending the costs over large amounts of equivalents units of outputs. Such overestimation not only results to inaccurate reporting but also violates the notion of integrity and objectivity of the whole process (Hansen, 2006, p. 56-58).
In management accounting, manipulation of accounts can be done in order to the accountant or the organization’s self-interest. Managers may interfere with the process accounts if they want a process to be dismissed as costly and therefore not feasible even though the process would have benefited the company.
Replacing existing assets
A manager’s decision to replace existing assets may be due to the self-gain motives rather than the organization’s interest. Cost benefit analysis may be a subject of manipulation in this case to replace an existing asset because of stake.
This is ensuring that vital accounts information are kept secret and are only accessible to those authorized to gain access to the information. This ethical aspect in accounting amounts to information security. Cost accountants should keep company’s information discreet and only disclose to those that are intended to. Disclosing this vital information puts a firm at risk and makes the firm loose crucial advantage to outsiders (Hopwood & Chapman, 2008, p. 64-67).
In cost accounting, managers should hold high ethical standards as far as reporting of accounting information is concerned. Cost accountants should refrain from indulging in activities that are not ethical in accounting practice. Integrity means reporting accurate information free from manipulation for stake
Advancement in technology has greatly influenced the conduct of cost and managerial reporting methods. These changes have led to innovation in cost management practices. Program software in accounting reporting system has enabled efficiency and proper decision making by managers. This advancement has enhanced ethical standards in cost accounting by greatly reducing chances of manipulation of accounts for the benefit of managers. E.R.P enterprise resource planning is a system with centralized database that connects with other functional cost areas of the company to provide actual data. This information system enables managers in a firm to make prompt and better decision. The system analyzes data at this cost areas and provides this information through the manager’s computer interface for decision-making.
Another important program that assists in cost accounting decision making is DSS (Decision support system).This program enables managers to use information that has been supplied from various cost centers. This system analyses cost information and prepares cost report for managers to facilitate decision making in a firm. For activity costing, ABC (activity based costing software) is utilized. This is online analytical application software. The program interfaces with decision support system to enable application such as budgeting, cost estimation and product pricing (Gelinas, 2009, p. 167).
Cost accounting reports are used internally within an organization for managers to make better decisions on companies cost with intention of improving profitability. This form of management accounting does not follow the generally accepted accounting principles like financial accounting but instead uses a method appropriate to communicate accounting information. This is because the accounting information is used within an organization and not for external consumption. Different cost accountants may use their own methods of cost account reporting for decision-making. This unstandardized method of account reporting may affect decision making depending on how clear the reporting system is (Lee & Epstein, 2010, p. 47-48).
This is the ability of accounting accounts to exhibit high levels of professional expertise in their reporting of accounts and general operation of cost accounting. They should also perform their duties in accordance with relevant regulation and standards. Cost accountants should also report clear, accurate and timely information to enable effective decision-making. Accounting skill and experience also plays an important role in professional competence. Proper competence in account practice prevents creation of errors and omissions that communicate inaccurate data for decision-making (Buchman, 1983, p. 92).
Work pressure to cost accountants
Work stress can contribute to inaccurate and possibly manipulated accounts leading to inaccurate reporting and hence poor decision making by managers. Cost accountants can develop stress because of too much work to perform within a short period. As a result, they may not effectively act professional in carrying out their duties and instead provide inaccurate data to complete pending assignments. In such situations stress related behavior may develop such as poor performance in assignment.
Nature of accounting information
In order for a better a better decision-making, accountants must make meaningful analysis of data from cost areas. It is important for cost accountants to distinguish between fixed, variable and other cost associated with the cost centers. Accounting information must be accurate, timely and reliable. For better decision making, the cost accountant will have to provide useful data such as budget estimates, forecast report and process account analysis.A good decision is dependent on information provided by the cost accountant.
Size and type of organization
The organization type and size will have effect on decision making as far as cost is concerned. A big organization with several profit, cost and revenue centers will have to find an effective cost account reporting system to utilize. The general decision on cost of the whole company will depend on the accuracy of cost report from all these cost centers. The cost managers will have to accumulate cost of all the processes in the firm and access them to the respective manager for decision-making. In big organizations, use of information technology is of great use in reporting of the costs associated with various department or processes.
This is the process of computation of actual cost incurred in a process or for a specific product and service in a company. To determine the cost incurred, different approaches in cost ascertainment are employed by different organizations and companies. Each method used should be able to meet the organizational set objective. The kind of costing method adopted by an organization may have an impact on the company decision making. Costing methods varies in application and cost managers using different methods may arrive at different conclusion. Some costing methods used by firms may include (Belkaoui, 2001, p. 220).
- Contract costing: – This method is used to cost job contracts. In this method, principles of job costing will generally apply.
- Batch costing: – it is another kind of job costing where costs of uniform products are ascertained.
- Process costing: – is a method of costing used to cost products at different level in the manufacturing process. Firm may decide to use F.I.F.O (first in first out) model or L.I.F.O (last in first out) model. Cost accumulated is associated with each process.
- Absorption costing:-This is a costing method where fixed and variable costs are charged on a product or service.
For a manager to make a better decision, accurate, timely and precise information are important tools in achieving this objective. Cost accountant have a ethical responsibility of reporting accurate information as pertains cost in order for managers to make right decision as pertains cost of the organization. False information on cost in an organization has led to instances of corruption and non-accountability of company resources. Organizations should develop clear policy on accounting ethics to minimize instances of account data manipulation and other unethical acts discussed above practiced by cost accountants so that reported information can be useful enough to make better decision in an organization (Bhimani, 2006, p. 24).
List of References
Belkaoui, A 2001, Advanced management accounting, Chicago, Greenwood Publishing Group.
Bhimani, A 2006, Contemporary issues in management accounting, New York, Oxford university press.
Buchman, T 1983, The reliability of internal auditors’ working papers, auditing: A Journal of Practice &Theory, 3(1), 92-103.
Caplan, E & Landekich, S 1971, Human resource accounting: Past, present and future, New York, National association of accountants.
Gelinas, J 2009, Accounting information system, New York, Cengage learning.
Hansen, R 2006, Managerial accounting, New York, Cengage Learning.
Hansen, R 2007, Cost management: Accounting and control, New York, Cengage Learning.
Hopwood, G & Chapman, S 2008, Handbook of management accounting research, London, Emerald Group Publishers.
Lee, Y& Epstein, M 2010, Advances in management accounting, New York, Emerald group.
Needles, E 2010, Financial and managerial accounting, 9 Edn, New York, Cengage Learning.