Full Project-COST ACCOUNTING INFORMATION AND PRICE DETERMINATION

Full Project-COST ACCOUNTING INFORMATION AND PRICE DETERMINATION

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ABSTRACT

Increased advancement in industrialization, engineering and general commerce has thrown a great challenge to managers.  There is increased competitions, and the survival of any company lies on the ability of the managers to apply the scare resources efficiently. Efficient management of resources call for proper control of inventory and revenue therefore, effective system of costing and good pricing policy is central and pre-requisite for the survival and growth of any organization in the global economic village. The topic “cost Accounting information and price determination’ is aimed at establishing how adequate accounting information can assist management in making sound pricing decision. Many business organizations in Nigeria collapsed in the recent past because they could not break-even.  In periods of boo, manufacturers are able to show profits notwithstanding the leakages which pass unchecked but in periods of trade competition, concealed inefficiencies have to be tracked down and rigorous control must be exercised to ensure even modest margin of profit, there is not yet an agreed best method of costing products though, it may be helpful to recognize that cost allocations are being used to obtain a mutually acceptable price and not necessarily to portray cause- and effect relationship of cost incurrence.  But price determined from efficient traditional income statement approach and /or contribution margin approach will most probably approximate the price of the product to its value.

 

CHAPTER ONE

INTRODUCTION

Accounting has often been considered as a series of activities which are linked together and culminate in a progression of steps summarizing and finally communicating information to its users. We may say therefore that accounting information has a special purpose and that is “decision making”. The task of the accountant is to transform raw data information. Cost and management accounting are the parts of accounting discipline which have developed, to meet up with the progress in technological advancement, production, sales and finance.  These aspects of accounting have broadened the boundaries of accounting profession and made it more useful to modern business enterprise.

Cost accounting is probably the field of accounting which has developed most greatly within the last half of this counting and there is no doubt about its growing importance.  This is partly because of the growing complexity of modern production methods, which results in greater capital investment and higher proportion indirect costs, and partly a reflection for the growing competition and widening markets in the business world.

All these factors necessitate the keeping of systematic and accurate records which will show the cost of goods produced an contract fulfilled. The job of accounting has shifted emphasis and focus from recording, interpreting and analyzing historical financial transactions, to a more challenging task of setting controls, devising the most efficient method of collecting, interpretation, analyzing and transformation of costs into useful information which is made use of by management in decision making which effects the future.

A cost/management accountant is now deeply involved in helping management to set-up control systems that make for co-ordination of all the activities of an organization thereby ensuring proper and purposeful direction and effective control. The cost accountant will draw on information, provided by the financial accounting system but he will also need to obtain much more detail of the internal workings of the business.  He will use data in monetary and non-monetary forms of house worked capacity of materials used, product manufactured, machine running hours, idel time ect.  He is concerned with finding the actual cost of products operations and departments, often comparing this with an estimated or ideal cost.  The emphasis on decision  making in recent years has brought together different disciplines which once were viewed as separate areas of knowledge.  The accountant has to be knowledgeable over a broad area if, he is to be efficient in providing information, which is relevant and useful for decision making.  The great task of an accountant is to transform raw data into information.  as an information specialist, the management accountant must be aware of the nature of information and its attributes.

 

“Information has no value in itself, its value is derived from the changes in decision behaviour caused by the information being available, it follows from this that more detailed information, more accurate information or earlier information is not necessarily better information only if its improves the resulting decisions, the production of information only incurs cost which are frequently considerable.  Benefits only arise from actions”.  Many difficult decisions arise as to whether to buy new equipments which will make new products or save cost and whether to make or buy components, whether to accept work at cut threat prices etc. this often require special cost analysis and studies.

The cost accountant discusses with the engineer about the life span of the plant and machinery, the most economic and efficient way of its use, the most appropriate method of depreciation, whether it will be more profitable to dispose it at a salvage value or to continue its use until it is scrapped. The supervisor provides the cost accountant with the information needed as to the usage of fuel, gas, energy. Light and heat etc.

The cost accountant will also look into the administration of wages; determine whether it is economical to engage labour at a piece rate or at a time rate, employ more workers and make room for shift futy or pay overtimes, the profitability or otherwise of the firm being machine or labor intensive cost accounting ensures the maintenance of good salaries and wages record, of classes of workers. Cost accounting has aided management in the formation of a sound and enviable labour policy and the determine the rate of turnover of labour.

Accounting information has assisted managers to control cost of raw materials effectively, determine the re-order level of stocks of raw materials.  That is, after taking into account the mimum stocks develop and the safety stock and also considering the carrying (ware-houseing) and ordering costs, rate of efficiency etc. The cost accountant laises with the works manager and from him, knows the processes involved in the production or manufacture, the cost incurred at every stage and seeks ways of controlling costs or improving the method of work which leads to reduction in cost and ultimately to increased efficiency.

The cost and management accountant therefore should have an in-depth knowledge of cost in every sphare of the organization in which he works.  He is usually a member of any budget committee set up in the organization and in some cases the chairman.  Hence it is his knowledge about the operational standards and the information which he obtained from the analysis of collated costs that form the basic budgeting tool.  In fact, with the development of cost and management accounting, the job of an accountant has increased from that of a financial historian to that of a financial analyst who provides management with needed information for future decision, for comparison and efficient management. Without an effective system of cost accounting, it is doubtful whether a business of any size can survive in the intensively competitive condition of today

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