A Study on essentials of cost accounting in an organization

A Synopsis submitted for the registration of Doctor of Philosophy (Ph.D) in commerce

1. Introduction

In the modern business world, the nature and functioning of business organizations have become very complicated. They have to serve the needs of variety of parties who are interested in the functioning of the business. These parties constitute the owners, creditors, employees, government agencies, tax authorities, prospective investors, and last but not the least the management of the business. The business has to serve the needs of these different categories of people by way of supplying various information from time to time. In order to satisfy the needs of all these group of people a sound organization of accounting system is very essential. In the ancient days the information required by those who were interested with a business organization was met by practicing a system of accounting known as financial accounting system.

Financial accounting is mainly concerned with preparation of two important statements, viz., income statement (or profit & loss account) and positional statement (or Balance Sheet). This information served the needs of all those who are not directly associated with management of business. Thus financial accounts are concerned with external reporting as it provides information to external authorities. But management of every business organization is interested to know much more than the usual information supplied to outsiders. In order to carry out its functions of planning, decision-making and control, it requires additional cost data. The financial accounts to some extent fails to provide required cost data to management and hence a new system of accounting, which could provide internal report to management, was conceived of.

Cost Accounting is accounting for cost aimed at providing cost data, statement and reports for the purpose of managerial decision making. The Institute of Cost and Management Accounting, London defines Cost accounting is the process of accounting from the point at which expenditure is incurred or committed to the establishment of its ultimate relationship with cost centers and cost units. In the widest usage, it embraces the preparation of statistical data,

application of cost control methods and the ascertainment of profitability of activities carried out or planned. Costing includes the techniques and processes of ascertaining costs. The Technique refers to principles which are applied for ascertaining costs of products, jobs, processes and services. The `process refers to day to day routine of determining costs within the method of costing adopted by a business enterprise. Costing involves the classifying, recording and appropriate allocation of expenditure for the determination of costs of products or services; the relation of these costs to sales value; and the ascertainment of profitability. 2. Importance of the Study This study is being proposed to test the essentials of cost accounting and its different cost technique in an organization. Cost accounting creates a financial value out of the production of a product, measuring currency that is nominal into units that are measured by convention. By taking recorded historic costs a bit further, cost accounting allocates a company's fixed costs over a specific time period to what items are actually produced during that period of time, creating a total cost of product production. Products that were not sold during that period of time produced a full cost of those products, recording them in a complex inventory system that uses accounting methods of its own that are in compliance with the GAAP standards. Managers are then able to focus on each period's results as it relates to the standard cost of any product. Any distortions in cost that were caused by calculating what the overhead of a product is versus what a unit cost is for companies that specialize in only one specific product are very minor in industries that mass produce that product with a low fixed cost. Understanding why costs vary compared to what was actually planned helps a manager to save a company money by taking actions that are appropriate to correct that variation in the future. As business are becoming more complex and have began producing a greater variety of products, the use of cost accounting to help make decisions in an organization to maximize profitability is under question. 3. Review of Literature The researcher so as to highlight the aspects and find the avenue of ample scope to do further research in this area has extracted previous literature. The following are some of the reviews taken preliminarily for this purpose:

A growing body of research has concluded that sophisticated cost accounting techniques were used before the second half of the 19th century [see, for example, Gutierrez et al., 2005]. This is contrary to some earlier management accounting historiography [see Fleischman and Parker, 1991, citing Solomons, 1952; Garner, 1954; Pollard, 1965; Kaplan, 1984]. Pollard [1965], for example, contended that high profit margins and the absence of competition provided little incentive for firms to adopt cost accounting during the British Industrial Revolution. However, Fleischman and Parker [1990, p. 220] have argued that some notable innovative cost accounting methods were used in the U.K. between 1760 and 1850. They cite the accounting practices of the Carton Company, a Scottish ironworks, in which the cost accounting processes "appear to have been motivated by the firm's early problems with securing adequate partnership capital, attaining profitability, and maintaining liquidity." Carmona et al. [1997, p. 412] analyzed the cost accounting system used by a large, state-owned tobacco factory in Spain, the Royal Tobacco Factory of Seville (RTF). They argued that intense competition most likely stimulated cost calculations which could be used in a quest to improve firm efficiency and strengthen competitive position. Nonetheless, they contended that in the case of the RTF, linking the emergence of cost accounting purely to the logic of profits "yields only a partial explanation of the cost accounting phenomenon" and that the development of cost accounting practices at the RTF was part of a strong disciplinary regime7 which aimed to minimize opportunities for tobacco theft and facilitate the surveillance of factory labor. Cost accounting techniques assumed this disciplining role, prompted by the importance of tobacco revenue to the State Treasury. Because of problems in ensuring effective visual supervision, the cost accounting system calculated expected costs of direct labor and material consumption for each phase of the production process. In a similar vein, Carmona and Donoso [2004] studied the role of cost accounting systems in enforcing public policy in early regulated (monopoly) markets at the Royal Soap Factory of Seville (RSF) (1525-1692). They found that a complex system of cost calculation had been the basis for price negotiations for many years and that centuries before the advent of scientific management in the late 19th century, the RSF's raw materials standards anticipated the introduction of standards based on expectations from prior results. Martinez Guillen [2005, p. 101] analyzed a memorandum authored by Antonio Bordazar de Artazu in 1732 (13 years before our analysis period), in which a costing model is presented for use in the Spanish printing industry. Bordazar's model is significant for two major reasons: first, it advocates cost-based

retail price calculations in order to help challenge a monopoly within a strictly regulated market; and second, it includes "concepts such as the imputation of indirect costs, application of interest and the separation of direct and indirect wages. In addition, the retail price was determined as a multiple of the total cost of the books." Utierrez et al. [2005] applied the model used by Fleischman and Parker [1991] and concluded that sophisticated cost accounting practices existed in Spain before 1800. The surveys of company practices by Fleischman and Parker [1991] and Gutierrez et al. [2005], although differing considerably in terms of their political, institutional, and social contexts, both suggest the emergence of modern cost accounting after 1760. The survey of Spanish practices by Gutierrez et al. [2005] was conducted predominantly in monopoly companies and in an environment of government (or crown) intervention. In contrast, the focus of Fleischman and Parker [1991] was on UK companies which were predominantly subject to private ownership and noninterventionist governments. Gutierrez et al. [2005] contend that sophisticated costing emerged in Spain as the cumulative result of two sets of factors. First, there were economic factors. Because the textile industry was open to foreign and national competition, most managers required information for decision making because of the business complexities they faced. Second, there were political factors. Most factories analyzed were related closely to the crown. Gutierrez et al. [2005] claim that the royal textile factories faced financial difficulties because of the high levels of capital investment they required, the need to integrate activities, high transport costs, and the lack of skilled workers. Such difficulties, especially the financial one, are argued plausibly to have prompted Spanish textile companies to monitor and control costs more closely and to use innovative accounting techniques [Carmona and Gomez, 2002, p. 237]. Of particular concern was the impact of fixed costs since the interest on debt was substantial and the salaries of accountants and managers were very high. 3. Scope of the Study This study will highlight the importance of cost accounting in different fields in an organization. Profit maximization with help of decision taken using cost techniques. Significances of Different techniques of cost- activity based costing, marginal costing, budgeting, standard cost accounting.

5. Objectives The following are the objectives formulated for the purpose of this study: Primary Objective - The primary objective of this study is To study the . Secondary Objectives While accomplishing the primary objective, the following secondary objectives are imperative to be achieved: To study the key cost techniques significant to managers in an organization at present To identify the perception of managers regarding cost control techniques.

6. Research Design a) Methodology This study will follow the methodology as given below: Firstly a through understanding of cost accounting techniques and approaches will be done with regards to its importance in decision making in a organization. Secondly, visit some manufacturing, service sectors to know about there cost system and its importance to them. Thirdly , after all the data is collected from primary and secondary source , a through analyses will be done and interpreted . b) Sample Size The study area (Bangalore), there shall at least be a minimum of 15 manufacturing or service sectors as samples, which shall be 15 respondents.

7) Analysis and Interpretation The collected data shall be first evaluated without using different forms of cost accounting approaches and than compared with date where cost approaches are used . After which, the researcher shall analyses the essential of cost accounting .

8. Limitations Firstly, during the course of research, the researcher may feel the shortage of time, which may lead to shortage in the information collected from primary sources. Secondly, as the primary data is proposed to be collected from organizations in Bangalore, the inferences arrived may not be applicable to other parts of the country or the world. 9. Chapter Scheme The following is the scheme of chapterization proposed for this study: I Introduction and Design of the Study 1.1 1.2 1.3 1.4 1.5 Introduction Importance of the study Scope of the Study Objectives Research Design 1.5.1 Methodology of the Study 1.5.2 Sample Size 1.5.3 Sample Design 1.5.4 Pilot Study 1.6 1.7 II III Limitations of the Study Chapter Scheme

Review of Literature Profile of the Study Area 3.1 3.2 Profile of South India Special features of the study area

IV V

Data Analysis & Interpretation Summary of Findings, Suggestions and Conclusion