PACE Academic IG

Introduction

Cost accounting is an integral part of management accounting.  Because of the emergence of service companies and the reliance on intangible assets, some believe that cost accounting is outdated.  I could not disagree more strongly!  Cost accounting has an important role in management accounting, especially with the increased role of AI.  I would like to share how I use cost accounting in my work as an accounting professor and an accounting systems specialist.

Organization

I use cost accounting to improve the understanding of transactions through two elements:

1.     Cost Behavior

2.     Job-Order Costing

Cost Behavior

Cost behavior determines how a cost, in total and per unit, responds to changes in behavior, which is changes in activities; the number of units purchased, the number of units produced, the number of units sold, and the number of hours worked are simple examples of activities.  The fundamental cost elements in this study are variable costs and fixed costs.  Variable costs, in total, change when activities levels change, but the per unit cost remains constant.  Fixed costs work in an opposite manner, i.e., when activity levels change, the total cost remains constant, but the per unit cost changes.  The third cost element is a mixed cost, a cost that has both variable and fixed elements, and the mixed cost is one I see as one example of how the management accountant can use cost accounting.

I recently used this example with students.  I want to hire a marketing consultant to develop a marketing plan for my accounting firm.  I provided students with two alternatives for compensating the consultant, one alternative that was a variable cost based on a percentage of first-year sales, and the second alternative was a flat fee, a fixed cost.  The discussion was interesting because, from my perspective, the fixed cost was the more popular choice, but for the consultant, the variable cost was the more popular choice.  What ultimately came from the discussion was the use of a mixed cost.

The third option, a combination of a flat fee and a percentage of sales, was seen as an opportunity to create wins for me and for the consultant.  The point I wanted to emphasize was a transaction is more than a debit and a credit or a change in the accounting equation.  Transactions can have positive or negative effects on stakeholder relationships, and these effects ultimately affect the ability of a company to exist over the long term.  What I wanted students to see, and how I work in developing accounting systems, is how cost behavior can go deeper into transactions in ways that can create wins for all stakeholders.  When all stakeholders win, the company wins, and when the management accountant can play an important role in the wins, the management accountant firmly establishes a seat at the company’s leadership table.

Job-Order Costing

Job-Order Costing focuses on how companies create specific products or services for specific customers.  What determines the use of job-order costing is the degree of customization, i.e., the more customization a product or service requires to meet the needs of the client or customer, job-order costing is a more appropriate system to use.  The system determines not only the total and unit cost of a job but also the ability to determine a price for the job.  What is typically used for the price is to increase the cost by a markup percentage.  The pricing approach, known as cost-plus, as well as the degree of customization, has helped me establish ways for job-order costing to be used by the management accountant.

Besides the system I previously described, what has stuck in my mind is the word “unique.”  In my lectures, this word appears when indicating a reason to use job-order costing.  Why I like this word is using this word to create products or services that stand out from competitors.  To stand out from competitors comes from an ability to establish relationships with stakeholders that provide materials, labor, and overhead.  What can also come from this connection is for the management accountant to be unique in ways that the management accountant can stand out in ways that go beyond the traditional perception of the management accountant.

Transactions, as previously stated, are more than journal entries and their effects on the accounting equation.  Transactions affect people, and people determine the long-term standing of companies.  Management accountants are in a unique (there’s that word again) position to go deeper into transactions by using elements of job-order costing that form a uniqueness in what companies create.  The uniqueness can be found in the materials appearing on a materials requisition slip and or direct labor captured on a time ticket.  Using the elements of a job-order costing system provides a foundation for a management accountant to help their employers stand out from competitors, which can help the management accountant obtain a favorable seat at the company’s leadership table.

Expansion

What I have presented is a call to action for management accountants.  You have an important role in the company that employs you!  One way you can increase your role is going deeper into what has been presented in this article.  Cost behavior and job-order costing can be expanded in ways that are limited only by imagination.  I encourage you to test your imagination by going deeper into these topics.  I also encourage you to go deeper into cost accounting, and here are two suggestions.

My first suggestion is to obtain material provided by the Profitability Analytics Center of Excellence (PACE).  PACE is a great resource for expanding your visibility as a management accountant.  My second suggestion is to follow a gentlemen named Gary Cokins.  Gary has an abundance of expertise in cost accounting, and his expertise can shine a light on another important element of cost accounting, Activity-Based Costing (ABC).  Both PACE and Gary can help you, the management accountant, go deeper into an area that will increase your visibility in your companies. 

Keep moving forward!

Conclusion

Management accounting has an important role in any company.  Whether the company is in services, merchandising, or manufacturing, a management accountant can improve the well-being of the company and its stakeholders.  One way a management accountant can improve the well-being of others is creating wins for all parties concerned.  In future articles, I will describe other resources for the management accountant.  For now, leadership can be provided for a company and its stakeholders when the management accountant uses something others see as unimportant, but is so important, cost accounting for the management accountant.

#Accounting #ManagementAccounting #CostAccounting