MEANING OF TRADITIONAL COSTING SYSTEM AND THE FACTORS AFFECTING COST MGMT SYSTEM

–           MEANING  OF TRADITIONAL COSTING SYSTEM AND THE FACTORS AFFECTING COST MGMT SYSTEM
ACCOUNTING FOR MANAGERIAL DECISIONS

–           TRADITIONAL COSTING SYSTEM

–           PROCEDURES WERE BUILT AROUND THREE PRODUCT COSTS:

I.            DIRECT MATERIAL

II.            DIRECT LABOUR

III.            OVERHEAD

–           AS COMPARED TO DM AND DL THE PROPORTION OF OVERHEAD COST WAS LOW.

–           IS THE ALLOCATION OF FACTORY OVERHEAD TO PRODUCTS BASED ON THE VOLUME OF PRODUCTION RESOURCES CONSUMED.. OVERHEAD IS USUALLY APPLIED ON THE BASIS OF EITHER THE AMOUNT OF DIRECT LABOR HOURS CONSUMED OR MACHINE HOURS USED. IT IS AN ACCOUNTING METHOD THAT IS USED TO PREDICT PROFIT. THIS METHOD USES CAUSE AND EFFECT TECHNIQUES AND TAKES INTO ACCOUNT DIRECT,INDIRECT AND EXPENSES IN BUSINESS

–           MAIN STEPS

–           THE MAIN STEPS IN ACCOUNTING FOR OVERHEAD ARE:-

1.       ALLOCATION AND APPORTIONMENT OF OVERHEAD TO VARIOUS PRODUCTION DEPARTMENT AND SERVICE DEPARTMENT

2.       REAPPORTIONMENT OF SERVICE DEPARTMENT OVERHEAD TO PRODUCTION DEPARTMENT

3.       OVERHEADS ARE AGGREGATED AT THE PRODUCTION COST CENTERS AND ARE ASSIGNED TO UNITS PRODUCED.

–           TRADITIONAL COSTING SYSTEM

–           .IN TRADITIONAL COSTING SYSTEM THREE COMMONLY USED METHODS ARE:

1.       THROUGHOUT COSTING

2.       VARIABLE COSTING

3.       ABSORPTION COSTING

–           EXPLANATION OF METHODS

1.       THROUGHPUT COSTING:-ONLY SPENDING FOR RESOURCES IS COUNTED AS COSTS OF THE PRODUCT AND ALL OTHER COSTS ARE EXPENSES,THEREBY ALIGNING THE FINANCIAL INCENTIVES OF THE MANAGERS USING THE RESOURCES WISELY.WHILE CALCULATING THE COST OF PRODUCT,ONLY THE DIRECT COST OF MATERIAL MEETS THE CRITERIA OF THROUHPUT AND THE COST ON ALL OTHER RESOURCES ARE COMMITTED. THESE COMMITTED COSTS ARE CONSIDERED AS OPERATING COSTS.

2.       VARIABLE COSTING:-MEASURE THE COST OF PRODUCT OR SERVICE ACCORDING TO THE RESOURCES USED TO PROVIDE IT.IT ONLY INCLUDES VARIABLE MANUFACTURING OVERHEAD AS A PRODUCT COST THAT FLOW THROUGH THE MANUFACTURING PROCESS.

3.       ABSORPTION COSTING:-ALSO CALLED FULL COSTING INCLUDE BOTH VARIABLE AND FIXED MANUFACTURING OVERHEAD IN THE PRODUCT COSTS THAT FLOWS THROUGH THE MANUFACTURING ACCOUNT.

–           FEATURES OF TRADITIONAL COST MGMT

·         CONCERNED WITH INTERNAL ISSUES AND INCLUDING PUTTING MORE STRESS ON CURRENT COSTS OF PRODUCTION,ALLOCATION AND POOL OF SHARED RESOURCES AND SUMMARIZING THE RESULTS.

·         HAS FOCUSED ON THE NOTION OF VALUE ADDED( SELLING PRICE LESS COST OF RAW MATERIAL) UNDER THE MISTKE THAT IS AREA IN WHICH A FIRM CAN INFLUENCE THE COST.

·         IT ONLY HELPS IN INVENTORY VALUATION,SHORT TERM OPERATION DECISIONS ETC. IT IS ONLY PROCESS OF ASSESSING THE FINANCIAL IMPACT OF ALTERNATIVE MANAGEMENT DECISIONS/

·         COST DRIVER IS  ONLY VOLUME OF OUTPUT

·         LIMITATION OF TRADITIONAL CSTING SYSTEM

a)       FOCUSING ONLY ON DIRECT MATERIAL AND LABOUR COSTS WHILE SUMMARIZING ALL OTHER COSTS TO ONE OR MORE OVERHEAD POOL AND THEN THESE ARE ALLOCATED ARBITRARILY

b)       TRADITIONAL COSTING SYSTEM DOES NOT TAKE INTO CONSIDERATION DIFFERENTIATED PRODUCTS UTILIZE RESOURCES IN DIFFERENT PROPORTIONS.

c)        OVERHEAD NOW CONSTITUTE THE LARGEST SHARE OF COST(MORE THAN 50%) LEADING TO  WRONG CALCULATION OF PRODUCT COST

d)       CREATES A BIAS TOWARD DIRECT LABOUR REDUCTION AS A COST REDUCTION METHODOLOGY RATHER THAN PRODUCTIVITY IMPROVEMENT.

e)       PROVIDE NO USEFUL INFORMATIOM FOR IDENTIFICATION OF PRODUCTIVITY IMPROVEMENT,

–           MEANING OF COST MGMT

–           COST MGMT: IT IDENTIFIES AND COLLECTS MEASURES, CLASSIFIES AND REPORT INFORMATION THAT IS USEFUL TO THE MGMT IN DETERMINING THE COSTS OF PRODUCTS  OR  SERVICES,PLANNING,CONTROLLING AND DECISION MAKING.

–           WIDE TERM INCLUDES BOTH COST AND MGMT ACCOUNTING

–           INCLUDES COST CONTROL AND COST REDUCTION

–           FACTORS AFFECTING COST MGMT SYSTEM

1)       GLOBAL COMPETITION:HAS INCREASED THE DEMAND NOT ONLY FOR MORE COST INFORMATION BUT ALSO FOR MORE ACCURATE COST INFORMATION TO BECOME MORE COMPETITIVE IN CHANGING SCENARIO

2)       GROWTH OF SERVICE INDUSTRY:-AS THE SERVICE INDUSTRY HAS GROWING RAPIDLY,SO THE COMPETITIVENESS REQUIRE PROVIDING EXCELLENT SERVICE AT COMPETITIVE RATE. THE CHANGES IN THE SERVICE SECTOR REQUIRE DEMAND FOR ACCURATE COST INFORMATION AND INNOVATION TO HAVE EDGE OVER COMPETITION.

3)       ADVANCEMENT IN INFORMATION TECHNOLOGY HAS HELPED THE BUSINESS AND ORGANIZATION TO SAVE TIME AND COST.

4)       ADVANCEMENT IN MANUFACTURING IN ENVIRONMENT SYSTEM HAS NECESSITATED THE NEED OF MOVING FROM TRADITIONAL COSTING SYSTEM TO MORE INNOVATIVE COST INFORMATION SYSTEM

5)       FACTORS AFFECTING COST MGMT SYSTEM

6)       LIMITATION OF TRADITIONAL COSTING SYSTEM HAS GIVEN BIRTH TO ACTIVITY BASED COSTING/TARGET COSTING ETC

7)       TOTAL QUALITY MGMT HAS DIVIDED THE COST INTO TWO CATEGORIES:-

ü  QUALITY CONTROL COST

ü  QUALITY FAILURE COST

8)       COST IS CRITICAL MEASURE OF EFFICIENCY. IMPROVING EFFICIENCY IS ALSO A VITAL CONCERN. BOTH FINANCIAL AND NON FINANCIAL MEASURE OF EFFICIENCY ARE NEEDED.

–           NEW CONCEPTS AND IDEAS

–           TRADITIONAL CONCEPTS

a)       OLD STYLE

b)       DOMESTIC MARKET

c)        COST ASCERTAINMENT AND CONTROL

d)       QUALITY CONTROL

e)       CONVENTIONAL MGMT

f)        COMPETITIVE ANALYSIS

g)       VALUE ANALYSIS

–           NEW IDEAS

I.            NEW STRATEGY

II.            GLOBAL MARKET

III.            TOTAL COST MGMT

IV.            TOTAL QUALITY MGMT

V.            ACTIVITY BASED MANAGEMENT

VI.            BENCH MARKING

VII.            TOTAL CUSTOMER SATISFACTION