Accounting For Decision-Making
Accounting as a business function plays a great role in the control of a business operations, allocation of resources and making of business decisions and strategies. Accounting has the responsibility to deliver relevant and accurate information on costs, sales and any other business data essential for the decision-making process. The business world is dynamically transforming and the business industry changing its operational ways and as such businesses are changing every day to an extent that it may be hard to predict the future of a business using its past or present information. As a result, accounting faces challenges that emerge from the world of business that is changing at a very fast rate.
Despite their usefulness, traditional, accounting methods are the main cause of the challenges that the field of accounting faces at the moment. The challenge emanates from the fact that most of these old accounting methods provide only a rear view on performance. They do not address the future or present unless on a speculative approach which uses projections from old data, but this is unreliable too because there are dynamic changes and forces that shape the market each day (Gunasekaran & Gupta, 2005).
Value costing has been introduced as one of the possible solutions to these problems. This form of costing is the perfect solution for the backward looking older accounting methods. This method of costing has various attributes that make it the perfect 21st Century method of accounting (Foster, Datar & Horngren, 2006). These advantageous features of the method include its integrative and forward looking nature. It is also real time and supportive of the process of improvement through external and internal benchmarking meant to identify and eliminate cost adding factors in a business.
Its accurate and reliable cost allocation and attribution help define and classify costs in a simpler manner. This method of costing may also be used to decompose costs of services or products to be offered in the future and this helps support target costing. It allows the business estimates of profitability by distribution channel choice, customer (market niche) and product and thus allows financial control to be effected by process unlike the older cost centre approach. Value based costing lays emphasis on influencing the behavior and not making number reports. These features enable value costing to meet the needs of a dynamic, forward looking business operating in an un-predictable environment that requires reliable information.
Traditional cost based methods of accounting are not totally useless because they may be needed in some scenario despite the fact that they may have lost some of their value because of the recent dynamism. However, their areas of application may be industry specific rather than in all other businesses. The ever growing trend of customization makes the use of some of these old methods obsolete, because in customizing industry there is no one size fit all and thus costs vary too and therefore, other versatile accounting methods may be required. But for industries that may be engaged in production of product on a mass production level then these methods may be applicable. A good example of these methods that is still very relevant in most industries is the Activity-based-costing method, which can be used to determine the value of the time and labor or use of any tool on any activity of production (Gunasekaran &Gupta, 2005).
Cost-volume-profit-analysis may have lost much of its relevance due to fast changing business trends, but it is still significant in some business aspects of management (Foster, Datar & Horngren, 2006). First and foremost it is the only method that one can effectively use in order to determine the volume of sales that s/he requires to attain in order to remain profitable. The use of the break-even point helps the businessman to learn the minimum threshold of sales that need to be attained so as to off-set expenses and leave profit margin. This fit enable the businessman or the sales department to make its sales plan and set targets that can enable it to make sales that can go beyond the break even point in order. Additionally, the cost-volume-product helps the business to learn the service or product that is most profitable through determining the units of sales required to attain a certain level of profitability (Simister, 2008). This helps the business management to know which service or product to emphasize in order to maximize their sales. The ability to predict the sales volume required to off set any increase in costs of a fixed nature is important and this can easily be predicted from the cost volume product method.
However, we have to note that the method is greatly limited on some aspects based on the fact that the separation costs into variable and fixed is a little complex, and fixed costs are not always likely to stagnate. It is also not reliable to assume that the sales mix will stay fixed because varies with demand. A part from volumes other factors such as efficiency, inflation and technology are likely to transform.
Foster, G. Datar, M. A. and Horngren, T. C. (2006),. Cost accounting: A managerial emphasis, 12th edition, Pearson Prentice Hall.
Gunasekaran, A. and Gupta, M. K. (2005),. Costing in new enterprise environment: A challenge for managerial accounting researcher and practitioners, Managerial Auditing Journal, Volume number 20, issue number 4: pp 337, 17.
Simister, P. (2008),. Break-Even Analysis-Cost-Volume-Profit analysis, retrieved on 8th January, 2011 from http://businesscoaching.typepad.com/the_business_coaching_blo/2008/06/break-even-analysis—cost-volume-profit-analysis.html
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