3.

1 Introduction Of Cost Accounting

What is cost accounting? According to Shim, J.K. and Henteleff, N. (1995),
cost accounting is a managerial accounting process that to aim the financial and cost
structure of a company. Cost accounting is a measure cost to cost object that
typically include a company’s product, service and any other activities that involved
in a company. Cost accounting is helpful for a business that help a firms to get know
more about profit, cost of goods, assets and its liabilities and planing for future
development of a business and mission and vision of a company. Cost accounting is
a system operational analysis for financial management which provide a financial
calculation aim to research, report, analysis and lead to improvement of internal cost
control and efficiency. To understand more in cost accounting system its key
concept, feature and importance of its which is the main source key that cannot be
avoid it. There are few undeniably influences will be affect to a business by cost
accounting implemented.

3.1 a) Importance of Costing Accounting

Planning a business strategy is essential in every enterprise. Cost accounting
plays an important role for a business to manipulate the strategy through the aspect
of cost relative plans. According to Inman, M. L. (1988), by identifying the financial
state of a business with cost accounting and therefore manage a business strategy
through its cost structure will provide the business a clear vision since costing were
always the backbone of a business. Cost accounting also aids in cost control, i.e., if
the price of raw materials is rising annually, it enables businesses to choose a future
course of action to lower or control the rising expenses.

Cost accounting hold a importance role for a company when come to

decision making process. Cost accounting is a system that provide for management
team to get more and better in understanding and study of a organization fixed and
variable cost and to implement a strong and correct path direction for a organization
for future direction. Beside this, cost accounting also can have a clear vision toward
to a organization financial and from there to optimize budget from years to years,
forecast and allocate resources where needed the most in a organization. In

1
budgeting process, cost accounting statement from years to years allow a
management team to study and research in term of cost from years to years and
decided need in increasing of the margin or not and plus, make the necessary
arrangement of fund to cater to the increasing prices.

Minimizing the production costs always the top concern of a business to

operates. Therefore here is where the cost accounting comes in to assist a company
to cater into this aspects efficiently. A pricing scheme would be conducted by cost
accounting for the business to retain their revenue in the highest margin could be
achieved instead of manipulating the cost from scratch decisions. As a result, with
implemented managerial cost accounting principles, the resources would be
distribute efficiently without leading to a situation that a company has high cost to
operates but the production were not be decisive.
The measurement of productivity serves as the primary objective of cost
accounting. It enables businesses to tangibly communicate based on the output
levels, keep track of the performance of the staff. This is very helpful because it can
be used to inform crucial decisions that must be made in the future. For instance,
investigations can be performed to identify the root causes if productivity levels are
trending downward. Furthermore, determining a company's performance through
accounting techniques is undoubtedly the most practical way to acquire the
information required for change implementation.

A company can measure its efficiency using cost accounting, then maintain
and enhance it. This is accomplished through comparisons and an investigation of
any differences that might be seen. For instance, material costs have grown. This
increase may be the result of higher material prices, greater wastage, inefficiencies
during the purchase process, or an unduly high price paid. Expenses of a business
such as power supply, insurance cover, advertising, maintenance, etc are consider
indirect cost of a firm can also known as overheard costs. A financial management in
a organization play a vital role by identify the direct cost and indirect cost of a
company. After separating the both cost, it come to more easy to identify the
unnecessary wastage and cost toward to a firm and resulting due to direct cost. A

2
firms can save and use it as a funds from the unnecessary wast age and costs as a
funds in resulting as a organization have more funds for future development,
development in employee, higher budget for years to years and invest in other
organization.

Thus after conducting the cost accounting with cost effective actions, a
significant material wastage deduction would have been observed. Production
material cost forecasting could be done with the understanding of better cost
structure by conducting cost accounting, therefore material waste reduction is
feasible. A company would be able to find out which part of the production is
unnecessary and then could cut down the cost to achieve better cost efficiency and
then results in its production material wastage. The lower the wastage of cost used
in production the higher the profitability margin will be.

3.1 b) Features of Cost Accounting

Cost accounting is a sub-field in accounting and is a process of accounting for
costs. Nowadays, a financial department team is a crucial role in an organization
whether the organization can be up to next level, future development, investors,
listed company and other. According to Layne, W.A. and Rickwood, C. (1984), cost
accounting provide a financial data for management team for decision making to
counter the current market, organization situation, competitor, social and other.
Beside that, cost accounting process help to establish certain standard cost of goods
for the target market, differential from the competitors, service to be provided for
the consumer and also budgeting for the future market development for a
organization. Through this, an organization can be more understanding its current
situation toward to potential prospect of current and future to be evade and also
generate more funds from sales and recover from unnecessary wastage for a firms
to be employ for its risk and development in the business.

Cost accounting provide a data the help to keeps track on earnings and
expenses incurred for goods and services. It offers statistical information for
planning submitting quotes and estimations. Cost accounting serves as the

3
foundation for cost estimation and control. Efficiency is assessed by contrasting
actual performance with the expected performance which involved in record the
information, analyzed it, compared it, and reported of information for day-to-day
managerial decision for daily operation and its operation cost.

3.1 c) Concept of Cost Accounting

The key concept of cost accounting is a business practice in which to
determine what a business record, examine, summarize, and study the company’s
cost that been plan to spend on any process, service, product, operation cost or
other anything else which related to organization of it operation. Cost accounting
provided a clear data and analysis which enable the management team to make
decision and strategic and cost to be more efficiency. There are a few various
techniques that been used by a organization in order to archive cost effective and it
mission and vision of the organization.

3.2 a) Weakness of Budgeting

According to R. Thompson, J. (1993), budgeting is a formal statement that
estimation of revenues and expenses over a specified future period of time and is
usually complied and re-evaluated on a periodic basis which based on future
organization plans and its objectives. In other word, budgeting is a statement that
operate by management team to predict the estimate generate revenue and
expenses for an upcoming period based on the goals for the business.

Budgeting consider a internal tool that often manipulate by the management

team and report to the senior level management or CEO which doesn’t require to be
reported to the external parties. Even though it is straightforward and consistent,
incremental budgeting is frequently criticized for having a number of fundamental
problems. Budgeting is not always a suitable solution for a company’s long run.
There’s some defects that exists in budgeting a company’s cost.

4
3.2 b) Weaknesses of Exciteco’s Incremental Budgeting
From the scenario studied, Exciteco company implemented incremental
budgeting into their financial strategy and operations. Incremental budgeting starts
with the present budget as a basis and then adds or subtracts incremental
assumptions to arrive at new budget amounts. The incremental budgeting technique
is typically regarded as the most conservative one out of all budgeting techniques.
This budgeting method gives this company very consistent result in operates its
budget and costing. Exciteco also benefits from the simplicity of the budgeting
structure in incremental budgeting but stills, the disadvantages of incremental
budgeting inflicted in this case.

3.2 c) Promotes Unnecessary Spending

Incremental budgeting always results in high material production spending
instead of using other type of budgeting. In this case, Exciteco were having high
material production spending on silver since they paid high prices to get constant
supplies. Since due to consistency of the this budgeting method, in a way that are
inflexible that results in they were spending a lot in material cost with large amount
of inventory without adapting to the current sales demand. The reason for this is
that departments within a corporation typically spend all of the funds that are
allotted to them in a budget in order to receive a higher sum of funds in the next
quarter. A business might eventually incur wasteful spending.

3.2 d) Discourages Innovation

Another disadvantage brought by incremental budgeting to Excito company
is that this will results in management decision of being innovative and catch up to
the latest sales production trend.
Referring to the case studied, Exciteco managers failed to anticipate and produce the
latest production model due to high budget required for the production division
needed to operates this idea. In most cases incremental budgeting inflexible drive
wouldn’t be able to include extra spending into innovative ideas unless a specific
fund were reserved for this purpose. The reason for this is that departments within a
firm often use up all of the money that is allocated to them in a budget in order to

5
get more money in the following quarter. A company might eventually spend money
inefficiently.

3.2 e) Fails To Account For Changes and External

Referring to studied case, the division managers were complaining about
budgeting process were taking too long that results in lower performance were
made in that year. Due to the inflexible of incremental budgeting, most company
would having constrained budget to forecast and prepare for upcoming years.
Therefore these company wouldm’t be able to match sudden change of demand and
failed to improving their sales profitability. In this case’s Exciteco’s production
division demands in manpower budgeting, but due to this budgeting method the
decision team unwilling to recruit extra staff that inflicted bad impact to their
production line. The fundamental tenet of incremental budgets is that business
operations will remain consistently stable. As a result, the budgets are not adaptable
to future changes that may arise from unanticipated events or other variables.

3.3 External Factor of Exciteco Lead To Poor Performance

3.3 a) Latest Production Technology Advancement and Changes of market trend

Technology improve and advance very quickly due to satisfy and fulfil
customer needs and wants. According to Sathe, V. (2007), technology company
need to be always be in develop and come out with new technology product in order
to against its competitors and stand up in the market where the world is always be in
improve and advance. A technology company like ‘Nokia and blackberry’ has stand
up in the market and be the best selling brand phone in 1998. However due to
lacking develop of the technology, Apple and Samsung has overcome them now
become the world top sell brand phone and also known as future technology in the
world as a listed company now. Exciteco has poor in cost accounting performance
due to poor budgeting cost that lead the Exciteco has not able to development and
update the product that to be supply in the market.
Due to low budgeting performance by incremental budgeting, Exciteco
hasn’t been to soften budget constraint that making their production division to

6
align with their sales division to operates their business to matching the latest trend.
The market trend in were always changing day by day, there would not exists a
strategy would make a company survive without amendment. Exciteco has to analize
their performance since their budgeting system were restraining them to improve
their business.

3.3 b) Limited Source of Material for Production

Exciteco has heavily relying on the silver material for their production.
Incremental budgeting makes this company unable to expand their supply of
material resources. A company should not relying heavily on one single material. This
company should increase their budgeting through innovate products that rely on
something else that has more cheaper and convenient material production. The
supply of market could be bad in case something happenned, in order to avoid such
hazard, having a production line on different industry could be considered since the
risk of influenced by the deficit of supply could be lowered that the business still be
able to operates and support its vital business function.

3.3 c) Sudden Incidents of External Environmental Hazards

Exciteco has limited budgeting system which cause the company counter well
whenever the company has faced on external environmental hazards. Due to the
fire out break and cause the main customer factory closed down, it resulting in sales
and the brand name has well down as in the market due to consumer has change
their purchasing to another technology company. Experience in those external
environmental hazards toward to the company, the management team should have
increase and set higher budgeting cost than last years, as consumer is always come
1st as if the production close down due to certain environmental reason, the
company can have enough funds and strong strategy to overcome it.

3.4 Benefit of Variances into Planning and Operational Elements

Operational variance are deviations from a standard that have been modified
after the fact, whether due to poor or good operational performance. According to
Gorman, G. (1992), an operational variance is to compares an actual result with the

7
revised standard years to years which help an organization in better in
understanding which part has been neglect, which part has perform well or bad, and
which part need to be implement new strategy.

One of the advantages of planning variance and operational variance are this
analysis highlights those variances which are controllable and those which are non-
controllable. By planning variance and operational variance, management team in
an organization has more time to come out a new strategy, implement, and abstain
the potential risk which can effect their consumer and profit. Another advantage are
planning and standard-setting processes should improve.

Management team of a company can be more accurate, relevant and

appropriate toward to the strategy to be implement whether it seem as a benefit or
not and change the strategy cause of the demands of the market. By implementing
planning variance into the finance analysis, the managers of the business will have
the awareness of which part of the business was actually has to be amend and has to
be improve on. On the other side, the part of the business that has no huge relation
with the discovered planning variance would required less monitoring and
supervision to saving managerial cost on less effective decisions.

With planning variance, Exciteco would have clearer perspective on how they
are performing in their business. The reflection from this would shows the actual
performance were done instead of analysis from just basis financial performance
accounted for. There’s a lot of operational variance would be reflected on a planning
variance. It might be seems overwhelming and taking longer time for a company to
process and implement the right action after the variances discovered. This is will
provide multiple choices for the company that lacking the idea to put the business
into a legit structure to operates especially in this case will tend to company
Exciteco.

8
Reference List

Gorman, G. (1992) Work Out Business Studies A-level. Basingstoke, United Kingdom:
Macmillan, pp, 208.211.

Inman, M.L. (1988) Cost accounting. London, United Kingdom: Heinemann., pp, 235-
237.

Layne, W.A. and Rickwood, C. (1984) Cost accounting: Analysis and Control. London,
United Kingdom: Macmillan, pp, 1-9.

R. Thompson, J. (1993) A Comparison of Planning, Programming, and Budgeting and

Zero Based Budgeting. rep. (Online). Available at:
https://apps.dtic.mil/sti/pdfs/ADA263912.pdf (Accessed: 15 April 1993).

Sathe, V. (2007) Corporate entrepreneurship: Top managers and new business

creation. Massachusetts, United State: Cambridge University Press, pp, 41-53.

Shim, J.K. and Henteleff, N. (1995) What every engineer should know about
accounting and finance. New York, United State: Marcel Dekker, pp, 38-44.