Title: Practical Issues in Managerial Cost Accounting
Abstract: The first in a series of articles exploring cost measurement issues. Necessity leads to invention. Less cash inflow leads to more emphasis on managing resources. This cause-and-effect seems fairly universal. It can be observed in companies facing decreased sales revenue due to increased market competition and in government organizations facing decreased budgets due to less borrowing and lower taxes. When organizations experience resource limitations, they are more interested in resource efficiency than when resources were more plentiful. This is clearly the case in government organizations as balanced budgets come closer to reality, while there are still calls for further tax reductions. Coping with constrained resources will become a way of life for the foreseeable future. As cost management practice develops and evolves, cost measurement systems must also develop and evolve. Many government organizations now find their cost accounting systems inadequate to support the new cost management agenda. Managing cost requires seeing cost in ways not typically needed before or supported by current data processing systems. Cost measurement for cost management is fundamentally different from cost measurement for external reporting. This series of articles will explore practical issues in cost measurement that are useful to develop managerial cost accounting systems. This, the first article in the series, explores the diversity inherent in managerial cost accounting, while differentiating it from cost accounting for external reporting. It also explores the managerial benefits of learning about costs to improve ad hoc decision-making and to motivate more economically rational resource consumption. Both dimensions of learning are discussed and illustrated with practical examples. Managerial Costing Differentiation Theory Managerial costing is fundamentally different from external reporting. Most accounting in government is external reporting to comply with external mandates. On the other hand, managerial costing meets management's internal need for cost information. Managerial costing and external reporting can be differentiated on several dimensions: purpose, measurement goal, measurement methodology, criteria for success and dynamics. Purpose: Organizations spend enormous resources on required external reporting. The Securities and Exchange Commission requires companies to publish annual and quarterly reports. Government organizations are required to submit budget reports by their legislative bodies. Even individuals file external reports-tax returns not because they are managerially useful, but because they are required. Managerial costing's underlying purpose, however, is mission support. Organizations develop this information because they need it to better manage limited resources with cost-accountable behavior and with credible cost information for decision-making. Measurement Goal: The goal of the external reporter is to comply with the requirements. Receivers of external reports typically have the power to enforce compliance. Misrepresentation, fraud, cooking the books or cheating on taxes can bring significant legal, civil or job-related penalties. The goal of managerial costing is to gain useful insights into the costs of the organization's processes, projects, products and suborganizations. Thus the measurement goal of managerial costing is learning. Measurement Methodology: External reporting tends to develop highly defined accounting methodology. Otherwise the reporting would be indecipherable to the external user. Generally accepted accounting principles, for example, provide readers of annual reports with a common understanding of corporate performance that would be impossible, if every organization used its own accounting principles. Managerial costing, however, only needs to be understandable to the manager who uses the measurement. …
Publication Year: 1998
Publication Date: 1998-07-01
Language: en
Type: article
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Cited By Count: 1
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