Cost accounting: the missing component in 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 tells me immediately that your company does not use cost accounting.

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

Financial accounting focuses on collecting historical financial information for use in preparing financial statements that meet the needs of investors, creditors, and other external users of financial information. Statements include a balance sheet, an income statement, a statement of retained earnings, and a statement of cash flows. Although these financial statements are useful to both management and external users, additional reports, schedules, and analysis are required for management to use in planning and controlling operations.

Financial management and accounting focus on the operations of the business as a whole and cannot provide the details necessary to accurately determine product costs and prices. At best, all they can do is provide averages. In addition, cost accounting provides the detailed cost information that management needs to control 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 properly allocate costs such as raw materials, labor, and other factory resources to products that are actually used, and then average them across all products. Without cost accounting, expenses such as major investments in physical assets, workforce development, depreciation, taxes, insurance, utilities, machine maintenance and repair, material handling, production setup, production scheduling, sales and Administrative expenses are usually grouped together to create an overhead cost. rate that is added to a product as an overall markup. The actual cost of a product is never determined, which means that the company charges too much for some products and not enough for others.

Cost accounting principles have been developed to allow manufacturers to process the various costs associated with manufacturing and to provide integrated control functions. The information produced by a cost accounting system provides a basis for accurately determining product costs and selling prices, and helps management plan and control operations.

Determination of costs and prices of products
Cost accounting procedures provide the means of determining product costs that enable the preparation of meaningful financial statements and other reports necessary to run a business. The cost accounting information system should be designed to allow determination of unit costs as well as total product costs. Unit cost information is also useful in making important marketing decisions, such as determining a product’s selling price, dealing with competition, bidding for contracts, and analyzing profitability.

Planification and control
One of the most important aspects of cost accounting is the preparation of reports that management can use to plan and control operations. Planning is the process of establishing objectives or goals for the company and determining the means by which 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 business in reaching its goals.

Cost accounting information enhances the planning process by providing historical costs that serve as a basis for future projections. Management can analyze the data to estimate future costs and operating results and make decisions regarding the acquisition of additional facilities, any changes in marketing strategies, and the 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 must know precisely what their responsibilities are in terms of efficiency, operations, production and costs. The key to proper control involves the use of liability accounting and cost centers by regularly measuring and comparing results and taking corrective action as necessary.