Costing system

Costing system

Part – A

Briefly discuss the features of your chosen costing system

The accounting system of costs refers to a framework. It is used as a useful method by firms to evaluate the products’ prices for getting an analysis of profitability, valuation of inventory, and controlling the costs. There are six primary costing systems in managerial accounting. Three central costing systems are standard costing, the operation of ABC, and marginal costing. The ABC system is the advanced part of standard costing. Two traditional costing methods, such as the cost of job-order and process costing, are also used by the companies to determine the product costs. Australia organizations have recently adopted the system of activity-based costing, as recommended by Weygandt et al. (2018). ABC or costing based on activity is used and implemented as an advanced method to calculate indirect and overhead costs such as services and products to utilities and salaries. This system is based on activities such as business units, business events, or tasks. The number of produced units is divided by the assigned costs of each product to calculate the overhead costs of each group under the ABC system. Analysis of ABC refers to an inventory technique of categorization in the management of materials, as suggested by Appelbaum et al. (2017). The inventory is divided by the analysis of ABC in three categories: accurate and hard control records called A items, excellent and low tight control called B items, and minimal and possible control records called C items. The ABC system works as a more reliable and accurate method in the firms. This system provides relevant cost information that is necessary for decision making. This method provides a clear understanding of cost drivers and overheads. Managers of the firms are allowed by this method to eliminate visible activities of non-value adding, as stated by Webster et al. (2018). The analysis of ABC helps to keep the capital costs low as this analysis addresses the accurate record of expenses.

Identify 2 specific Australian companies that your chosen costing system is suitable for, and explain why.

The Australian company of oil and gas and general motors, manufacturing firm of Australia, has adopted and implemented the ABC system under the costing system. These two companies used traditional costing systems as they faced some vital drawbacks in business, as stated by Lourenço (2019). Many firms use the conventional costing system as a method of determining profits. This costing system rarely measures overhead costs and often provides relevant cost information, which is a prime aspect of decision-making. There is a massive difference between the traditional costing system and the ABC system in complexity and accuracy. The conventional system of costing is less accurate but a simple method than the system of ABC. The system of ABC provides more precise cost information but a complicated process. Product-based overhead costs are assigned by the operation of ABC, as commented by Hancock et al. (2018). The traditional costing method uses a single driver of the cost that can not calculate the overhead costs accurately. According to a survey, 213 firms of manufacturing in Australia have adopted and implemented the ABC system. However, the ABC system’s adaptation rate is low all over the world as this system is considered to be rhythm about whether the implementation of this system will be successful. Many firms are not willing to take risks as this system is more complicated than traditional costing systems. Besides, the method of ABC has proven effective for these two firms in Australia. Australian organizations have fully implemented the ABC system compared with traditional costing systems, as stated by Homer et al. (2016). The ABC system has provided net benefits to these two firms and restructured these companies’ account management. The successful implementation of ABC measures the evaluation of manager, decision use, decision-making improvements of dollars, improvements in job performance, and characteristics of the technology.

Discuss two potential uses of the cost information for decision-making, to the managers in each of the 2 organizations selected in Q2 above.

Cost information is used as a system or method in business that plays a vital role along with the process of decision making. This method covers aspects such as the estimated efficiency of work, detailed cost analysis, and the calculation of production costs. A solid basis is provided by these aspects of the cost information method for controlling business finance, as recommended by Viney et al. (2016). Two potential uses of cost information methods for decision making are stated below.

The costs relevance in the management of decision-making

The main goal of accounting management is to calculate the costs with accuracy. The cost of accounting creates an interface between the accounting of management and financial accounting. The company’s ultimate purpose is to represent maximized profits and minimize costs. The management of accounting is used as a tool in the management of decision-making that controls the firm’s overall management. As a result of the cost information system, the actual costs are compared with budgeted costs and decisions based on this analysis by the management, as recommended by Catling et al. (2016). This method of cost information controls the costs that become the essential factors for managing the firms. These two Australian firms used the cost information method to detect the relevance of decision-making expenses.

The marginal costs in decision-making

Accounting management uses marginal costs to identify all expenses. Minimal costs are used as an activity that assesses the impacts of strategic outcomes. The marginal costs are not used as a method but as a tool that provides solutions to some management drawbacks such as the accepted price of additional order and the process of increasing the strategic outcomes. These two Australian firms have implemented the tool of marginal costs for addressing the management issues, as recommended by Scarf et al. (2016). This tool has provided the solutions related to the management issues. These solutions drive decision-making management smoothly.

Part – B

Based on your chosen costing article, briefly summarise how the costing system was designed and implemented in your real-life organization. 300

The costing system is an essential element in decision-making. The costing method is designed to identify the costing gaps in the organization and monitor the calculation of profit and loss related to the business. Australian organizations adopt the system as a decision-making process that consists of a set of reports, controls, forms, and procedures. These aspects of the costing system are designed to determine the revenue, profitability, and costs. After that, report to the management of the organization, as recommended by Vaio and Varriale (2018). The costing system is also called the method of cost accounting. The system of cost accounting is implemented in Australian organizations. It is considered as an effective system that is a core aspect of managerial accounting. This system is used as a framework that enumerates the products’ costs for the analysis of productivity, control of costs, and inventory valuation.

Two central cost accounting systems are process costing and costing of the job order. Australian organizations have adopted the costing policies that have been proved as a successful system for organizations. Cost accounting evaluates all input costs related to production costs that include fixed and variable costs, as suggested by Weygandt et al. (2018). There are four central systems of cost costing in accounting: costing of standard, activity-based costing, and lean costing. The activity-based costing system (ABC) is considered the most effective costing system in accounting. Australian organizations mainly implement an activity-based costing system to evaluate their production cost. As per the chosen article, an Australian oil and gas company has successfully implemented an ABC system of accounting in the organization. The cost management of this company has adopted the system to determine all input costs, as recommended by Sumrall (2019). This system has impacted on cost management. This system has created better cost control and provided accurate cost information. The process of ABC implementation has proven effective for this company.

Based on your chosen costing article, did the costing system in the study satisfy the features discussed in Part A (Q1)? Why or why not? Include examples in your answer from your costing article.

According to the chosen article, the system of costing is identified as the most effective system for cost management of the organization. This system has been implemented as a framework in the Australian gas and oil company to evaluate profitability, revenue, and production costs. This framework is covered with some essential areas of revenue costs and profitability. These areas include services and products, sales regions, development, and research, facilities, departments, and customers, as recommended by Lourenço (2019). The system of costing provides costing information to the management of the organization. The main areas of the costing system are stated below.

The costing system’s report generates high profitability that is an original part of an effective accounting operation in the organization.
This report on cost information decides where to eliminate the cost to get profitability in the business.
This cost information helps the account management associate the net incurred costs against the cost of the budget to control the cost purpose.
The management creates a tactical and strategic plan for future cost operations with the help of a costing system.

The organization has adopted effective based costing, which is one of the vital systems that come under standard costing. There are six types of costing systems in general in cost accounting. Standard costing is one of them used for control purposes in the organization. The cost of the standard refers to the advanced production costs that are predetermined. The system of standard costing provides standard cost and analysis and measurement of variances for control purposes, as recommended by Kontsevaya and Alborov (2017). A base for control is provided by standard costing through the accounting of variations. The frameworks of accounting, such as IFRS or GAAP, are internally used by the management to create a cost system report. This report helps the management decide what information is useful and what needs to be ignored, as suggested by Jiambalvo (2019). There are some reports created through the system of costing, which is stated below.

Reports on net costs incurred against budget costs
Reports on the profitability of sales regions, stores, products or services, customers
Reports on expense trends that provide monthly incurred costs include all expenses.

These reports may also provide additional information to the management. The accounting department of the company assembles additional information. This information gives all details, including individual incurred costs, as suggested by Lim et al. (2018). The costing system works as a tool for accounting to manage all the accounting costs.

There are two central systems of costing: the method of job costing and the method of process costing. One other hybrid approach, the system of activity-based accounting, has been adopted by the organization, which has considered the most effective strategy for the business. The costing system based on activity was developed to determine the overhead costs appropriately. The overhead costs are indeed vital for addressing all incurred costs, which are rarely allocated in the other two costing systems. The system of ABC activity-based costing is quite challenging to implement. Still, this system is active when it is designed for specific cost allocation projects, as commented by Scarf et al. (2016). That is why the Australian company has implemented this system of costing in a designed manner that has determined all incurred costs and clearly defined the drawbacks of the accounting system.

Based on your chosen costing article, how useful was the cost information to the organization’s internal users? Discuss with examples from your costing article.

The system of accounting provides cost information that is a significant aspect of decision-making. The account management uses relevant information on costs from cost information provided by the costing system. This relevant information is evaluated by the managers of the organization for making strategic and operational decisions. The cost information has determined some critical aspects of the business, such as the selling price of oil and gas, the profitability of services and products, and product mix., as recommended by Akhter et al. (2020). Cost information plays a significant role in future decision-making and planning. This information is considered useful for managerial decisions.

Two primary systems of cost, such as process costing and job costing, are not much useful for decision-making and have been massively criticized. These systems employ imposed overhead costs in an inappropriate manner that drives the accounting system towards the distorted costs of products. That is why ABC or the method of accounting based on activity was developed for getting accurate cost information, as suggested by ElGammal et al. (2016). The ABC system helps account management to overcome the gaps found in the previous two costing systems. The ABC method is defined as the methodology of costing that traces the indirect costs to product and customers’ activities in the business. ABC system is the core concept of ABM or activity-based management. The Australian company of oil and gas has implemented the ABC system’s process for generating success in the business, as opined by Zuo et al. (2017). The implementation of this process has been proved successful and useful for the company.

The success of ABC implementation

The implementation of the ABC system promotes innovations in the organization. ABC implementation indirectly increases the value of shareholders in the business. The success of the ABC system is determined through a survey conducted by the organization. The success depends on users. If users’ attitudes are unfavorable towards the system, it means this system is not accepted by the users, as Hasan (2017) suggested. Satisfaction and positive view of the users are considered as the innovation in the business brings success to ABC implementation. Six stages of ABC implementation are stated below.

Initiation

At first, the ABC system’s process identifies the activities of the product line or service supported by activity pools. Assigned costs may be included in this activity pool.

Analysis of activity

The costing requires an activity analysis of ABC, similar to the mapping process of manufacturing. The indirect relationship of costs is identified through this activity.

Adaptation

In this step, this process assigns the capacity of costs. Cost information is available but not usable for decision-making by the staff of non-accounting.

Acceptance

In this step, the activities of this process calculate the activity costs of the unit. These activities determine the value of the expenses in real currency. The upper management occasionally uses the system as a model for decision-making.

Routinization

In this step, these activities of the system construct and develop the time equations. The upper management commonly uses this system for decision-making. This system is considered as a prime element in the system of information.

Integration

In this step, these activities calculate the service or product cost. The system of ABC is fully compacted with the financial system.

Figure 1: The stages of ABC System

(Source: Zakka et al. 2016)

Based on your literature findings, state two key lessons that would inform contemporary organizations about the practical use of your chosen costing system.

Due to the drawbacks of conventional cost systems, Australian organizations have adopted the ABC system or the costing system based on activity. The ABC system was developed as an alternative way of traditional cost systems. General Motors in Australia has adopted the policy of ABC. This Australian organization has faced significant benefits in some areas of business, such as profitability improvements, timely cost information, accurate costing of products, improvements of the working environment, and physical operations, as recommended by Mantilla et al. (2018). Some Australian firms use this system for a short time to not adequately identify the benefits of a business unit. The manufacturing firm, general motors, is considered as a full adopter of this ABC system. Some useful factors were identified as the benefits of this system that influenced the users’ expectations and satisfaction. These benefits are such as communication improvements, confidence in decision-making, understandable and reliable information.

The ABC system is relevant to traditional methods as the ABC system improves some aspects of service or product costings, such as relevance, reliability, and accuracy, as argued by management accounting literature. This system evaluates the non-value adding and value-adding activities of costing by highlighting the way of used resources across the value chain of this company. The current business environment of this firm is characterized by some aspects such as more significant investments in automation and technology, extensive consumerism, extensive diversity in products, and greater competition globally as this firm implemented the ABC system, as recommended by Lu et al. (2016). This system provides more relevant and accurate information on costs to this firm for short- and long-term decision-making, which is advantageous to the user of this firm.

Two key lessons of the ABC system found in this firm would inform contemporary organizations about the practical use of the ABC system. These two key lessons are stated below.

Impact on processes of the organization

The managers of this firm faced some drawbacks for the traditional system, such as they had to deliver high-quality products with down costs and get products from the market at a high price. The conventional method of cost has been criticized for creating these drawbacks. These drawbacks failed to facilitate the cross-functional approaches of this implementation. After implementing the ABC system, information that addressed the inefficiencies of organizational processes was provided by the ABC system by annexing a focus on productivity improvements and reducing waste, as recommended by Alsayegh (2020). The ABC system’s implementation has proven more impactful for organizational processes that help attain organizational goals.

Improving job performance of the user

The support systems of decisions are impacted by the positive attitude and satisfaction of users. In traditional methods, users were not much satisfied with inaccurate information. The information on the ABC system is more useful for improving individuals’ job performance in this manufacturing company. The cost system of ABC determines costs more accurately and reliably to objects, as recommended by Arora and Raju (2017). This system provides understanding to the users by evaluating the way of used resources across the firm’s value chain that delivers strategic outcomes.

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