Preparation Of The Statement Of Cash Flows Does Not Involve: Cost Accounting: The Missing Component of Supply Chain Management

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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 of producing one of your items?” After five years of training, I can count on the fingers of one hand how many students were able to answer these questions, which immediately tells me that their company does not use cost accounting.

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

Financial accounting is focused on the collection of historical financial information that is used in the preparation of financial statements that meet the needs of investors, creditors and other external users of financial information. The reports include the balance sheet, income statement, retained earnings statement, and cash flow statement. Although these financial reports are useful to management as well as external users, additional reports, schedules and analyzes are needed that management can use in planning and controlling operations.

Managerial and financial accounting focuses on the company’s operations as a whole and cannot provide the details needed to accurately determine product costs and prices. At best all I can do is give averages. In addition, cost accounting provides detailed cost information that is needed to manage 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 correctly 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, costs such as large investments in physical assets, workforce development, depreciation, taxes, insurance, overhead, machine maintenance and repair, materials handling, production set-up, production planning, selling and administrative costs are usually added up to give created overhead rate that is added to the product as a margin for overheads. The true cost of a product is never determined, meaning the company charges too much for some products and too little for others.

Cost accounting principles were developed to enable manufacturers to process the many different costs associated with production and to provide built-in control features. The information produced by a cost accounting system provides a basis for determining accurate product costs and selling prices and helps management plan and control operations.

Determination of product costs and prices

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

Planning and control

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

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

Effective control is achieved by assigning responsibility for every detail of the production plan through the establishment of cost centers. All managers should know exactly what their responsibilities are in terms of efficiency, operations, production and costs. The key to proper control involves using responsibility accounting and cost centers by periodically measuring and comparing results and taking the necessary corrective actions.

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