Need for Cost Management | Accounting

In this article we will discuss about the need for cost management.

The business environment has changed dramatically after 1980s. Improved communication and transportation systems brought about a much more competitive environment. Spending on marketing and distribution has increased.

The modern organizations started exercising strict control over manufacturing costs. Information technology changed the way organizations conducted business. Large volumes of products, customers etc. required better planning systems for their moment and control.

The traditional cost accounting systems are criticized for the following reasons:

(a) It does not provide detailed information on process efficiencies.

(b) It is focused too narrowly on inputs, such as direct material, direct labour etc. that are relatively insignificant in today’s production environment.

(c) It fails to provide accurate product costs.

The cost behaviour in traditional accounting is usually seen as the distinction between fixed and variable costs. The true and accurate classification of costs is seen difficult exercise due to existence of semi-variable or semi-fixed component in total costs. Volume of output is normally determined by many different products which all have different impacts on fixed and variable costs. Cost do not behave in a smooth and homogenous manner.

Factors that could affect cost behaviour include mass quantities, decisions, policies, movement and volume. Cost Accounting for decision making should consider the implications of these factors on cost structures.

These factors could be grouped into the following levels of variability:

i. Unit Level:

Costs vary in proportion to change in units produced. The cost driver will be a volume indicator such as kilograms or units.

ii. Batch Level:

Costs vary in proportion to the number of times preparation for any process will be required. The cost driver could be the setup time on machines or the number of batches. Batch level variability also includes actions on groups of items, for example, orders and invoices often consist of more than one line item.

iii. Product Level:

Costs will vary when a change is effected in the product or model. The cost driver could constitute changes to products or designs.

iv. Process Level:

Costs will vary when process changes take place, such as maintenance to the process or re-engineering of the process. The cost driver would be the number of such changes.

v. Plant Level:

Costs are incurred to sustain the facilities and premises such as security, insurance and rental. Cost drivers could include time, decisions, space, etc.

In the current industrial scenario it becomes difficult in the industry to sustain and survive unless the costs are correctly accounted for, controlled and reduced so as to sustain and remain in the industry.