COST ACCOUNTING AS A FACTOR OF QUALITY BUSINESS

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AUTHORSCONTENTS7th Research/Expert Conference with International Participations”QUALITY 2011“, Neum, B&H, June 01 – 04, 2011COST ACCOUNTING AS A FACTOR OF QUALITY BUSINESSDECISION MAKING IN MODERN COMPANYRadmila Jablan Stefanović,PhDProfessorUniversity of Belgrade, Faculty of egardless of the specific commitments in terms of business strategy, the modern company is,inevitably, faced with the requirement of cost competitiveness. In modern conditions of great externaland internal complexity, achieving and maintaining competitive advantages, as a condition sine quanon of modern business, is not possible without adequate information system. This paper puts anemphasis on the importance of flexible designed cost accounting information system – a keyinformation core of company accounting information system – in generating quality information as asupport to modern company management mechanisms. It also discusses some of the new and, inturn,enhanced existing tools, techniques, concepts and approaches to costing and cost management(ABC/ABM, TQC/TQM, TC/TCM,LCPC/LCPCM, VSA/VSM) which are fundamentally important inorder to implement and support the competitive strategies of companies.Keywords: es,costaccounting,cost1. COST ACCOUNTING INFORMATION ROLEThe modern company achieves its success as a result of the interaction among theenvironment, resources and management – its ability to employ the resources adequately,bearing in mind the company's position (its strengths and weaknesses). This requires, alongwith acceptable risk, a maximum exploitation of challenges brought by the environment, inorder to realize the interests of various stakeholders. The management is expected to lead thecompany towards the achievement of set objectives which, in the contemporary settings ofmarket external and internal complexity, inevitably requires sophisticated expert knowledgeand skills, as well as quality information support.The accounting of a company has, basically, the objective to create a quality information basiswhich, ultimately, has to be in the function of efficient company management. Cost accounting(CA), which measures and reports financial and non-financial information related to theorganisation’s acquisition or consumption of resources [4,p.5], has an exceptionally importantposition within the entire accounting information system of an organization because it providesinformation to both management accounting and financial accounting as subsystems of theaccounting information system. When its information is intended for the financial accounting itmeasures product costs in compliance with the strict legal and professional regulations;however, when its information is used for internal purposes it provides the basis for planning,145

AUTHORSCONTENTScontrol, and decision-making. Thus, CA information support is not exhausted by providinginformation for the purpose of reporting balance sheets and income statements of the companyas a whole, which is its traditional task. It also provides valuable information support for themanagement in performing the systematic management control as well as in making variousbusiness and financial decisions. This means that its information support is expanding towardsthe creation of relevant information for internal reporting on a company’s business activities –especially for short term periods and in smaller organizational segments. Cost data for thepurpose of internal reporting are meanwhile relatively free from the constraints of legal andprofessional regulations. Accounting data used for external reporting very often do notcompletely satisfy managers’ needs for decision-making purposes. Attempts at slightmodifications of financial accounting systems for managerial purposes rarely and happily – likeeating soup with a fork: it’s possible, but it’s far from effective [7,p.9]. Meeting variousinformation management needs related to making individual business and financial decisionshas been emphasized over the last few decades as the fundamental CA task – it assumescalculating costs and benefits of individual business alternatives. By using unroutine costbenefit analyses, CA creates reports based on the concept of relevant information [4, pp.301328] - relevant costs (relevant revenues as well), in choosing among alternatives, assumesconsidering the expected future costs which differ in alternative actions. Relevant cost analysisgenerally emphasizes quantitative financial information, but in decision-making, managers mustpay due attention to quantitative nonfinancial and qualitative information and must,occasionally, give greater significance to qualitative or nonfinancial quantitative information.While designing CA information system one must not lose sight of the following [7,pp.71-72]:decision-makers’ needs must be met; different cost information is used for different purposeswhat works for one purpose will not necessarily work for other purposes; cost information mustmeet the cost-benefit test – cost information can always be improved, but before establishing anew system, one basic question should be asked: will the benefits outweigh the costs? It is ofvital importance that CA information system should be flexibly designed – being flexible, it willbe able to adapt to changes occurring in the business environment as well as in the companyitself and, accordingly, respond in a qualitative manner to numerous and various companymanagement information requirements. Today, regardless of the concrete orientation regardingbusiness strategy, the contemporary company inevitably faces the requirements of costcompetition. Modern business environment inevitably requires CA restructuring and newapproaches to cost management (CM) in order to improve cost information quality. In newcircumstances, many information weaknesses are attributed to traditional approaches to costingand CM [2, p.355].2. NEW KEY THEMESA few new key themes have to be stressed. First of all – customer in focus is the of theorganization’s success. “To be customer-driven” lies at the heart of CM; among all aspects ofbusiness operations which the management must take care of, the customer is the mostimportant because without him the organization loses its purpose. There is a permanentquestion in the way business operations are performed which puts the emphasis on customersatisfaction: how can value be added for the customer? The focus is on the most profitablecustomers and the ways to first attract them and then retain them. Today, companies firstidentify customer needs and demands, and then proceed with the product design andproduction. Value chain and supply chain analysis is also a key theme. Value chain (VC)facilitates consideration of the possibilities of achieving and retaining competitive advantagethrough strategically relevant activities. By using VC and activity cost information companiescan identify strategic advantages on the market. Supply chain (SC) assumes the idea of an“extended company” and the focus expands from company production VC to purchase VC on146

AUTHORSCONTENTSthe one hand to distribution VC as the final part of the whole industrial VC on the other. CMemphasizes integration and coordination of these activities through all links i.e. companies inthe SC, as well as through each business function in the VC of individual companies. Costs,quality, time and innovations are key factors of business success. The management mustcontinuously focus on these key strategic variables in relation to competition, which surpassesthe frames of their company and draws their attention to changes in the external environmentobserved and assessed by their customers as well. It is of vital importance to manage themcarefully and thus affect the level of customer satisfaction. Low costs are a significantbusiness goal but cost improvement does not necessarily have to be sufficient. Customerswant more than just lower prices and costs – they want quality, responsibility, punctuality.The combination of benchmarking and continuous improvement is an ever-present theme inthe new approach to management. Benchmarking is a systemic process of measuring andcomparing one’s own products, services and activities against the best performance levels(inside or outside of the company). By comparing with the best examples, the managementfinds ways of continuously improving their proper practice. Benchmarking and continuousimprovement are often described as a “the race with no finish” because management andemployees displeased with a particular performance level seek continuous improvement.When they adopt this philosophy, the organizations perceive that they are able to achieveperformance levels which they previously considered unattainable [7,p.15].New environment brings new challenges and problems which inevitably impose the need forserious reconsideration of past business philosophy established in stable and predictablebusiness settings. It is of great importance to adopt a wider external orientation with theconstant focus on changeable and sophisticated customer demands. The company’s existence onthe market directly depends on the degree of fulfillment of customer expectations but also onthe intensification and strengthening of cooperation with other organizations from theenvironment (customers, suppliers, distributors). Quality exchange of ideas and information,better interorganizational coordination and integration of vital business activities are necessaryassumptions for more successful competitive positioning of the company on the market.3. TRENDS IN COST MANAGEMENTWhile considering the development of CM, it is very important to link it to modern challengesto organizations. Therefore, suggestions go in the direction of separating it from traditionalaccounting and abandoning the long-standing linearity of measuring historical costs and staticstandards. Managers should anticipate rather than simply react to changes in cost structureand financial performances. In the past few decades there has been an increasing number ofdiscussions about CM and extending various limits. It is a dynamic process which assumesintensive efforts directed towards continuous improvement, i.e. improving the existing andinventing new tools and techniques, starting with early activity-based costing models andpursuing lately in the direction of strategic cost management (SCM). In that period, the mostprominent trend has been shift the focus from determining product costs by using standardtraditional cost models, towards providing support for strategic and operational decisions byusing certain forms of activity analysis. The turning point in the development of CA was theadvent of Activity Based Costing (ABC) which emerged primarily as an expression of theneed to provide much more accurate data about the output cost price compared to traditionalmethods. It focuses on activities as parts of the entire process in a company and their causeand effect relations with the resources used as well as with cost objects (products andservices, market segments, customers) i.e. activity drivers. However, management can use itnot only for the purpose of calculation, i.e. more accurate product costing and, therefore, moresuccessful price and product and service range management, but also for providing financialand nonfinancial information on activities, and effective CM – as assistance to activity based147

AUTHORSCONTENTSmanagement. When considering the use of ABC for the strategic purposes, many expertsthink that it offers strategic opportunities to companies. Many companies have gainedcompetitive advantage due to ABC information, i.e. cost reduction by lowering prices in orderto increase their market share. Activity Based Management (ABM) focuses on managingactivities with the aim of increasing the value which the customer receives and profit obtainedby providing this value, which assumes driver analysis, activity analysis and performanceevaluation. The main data information source for that is ABC. Using cost information aboutvarious activities helps managers to identify activities that do not add value to products butwaste resources, and also urges them to redesign expensive production methods. Thus,according to ABM approach to company management the attention of managers is directedtowards company activities; ABM assumes a set of decisions and actions based on ABCconcept information. The goal is to increase the value delivered to customers and to boostcompany profitability to a higher level. Strategic and operational ABM are singled out.Strategic ABM assumes directing the organization towards the most profitable use ofresources. Due to ABC information we can point out non-profit activities as well as the mostprofitable ones, and make decisions affecting product development and design, fixing salesprices, specifying the production and sales mix, and establishing and developing relationswith key customers and suppliers. All this can be achieved due to skilfully combining of theknowledge about cost behavior (i.e. their drivers) with the knowledge about customerbehavior. Operational ABM assumes decisions and actions with the goal of continuousimprovement of business processes; and for designing ABC systems, as its informationsupport, several hundred activities may be necessary in order to obtain better insight intoprocesses underlying production and customer service. Operational ABM is directed towardsthe improvement of efficiency and reduction of resources necessary for performing respectiveactivities.[1, p.278]. ABC model determines where the greatest possibilities of cost reductionlie; but ABC information is not a current operating tool for the activities of improvement.This model offers the key direction for decision-making where to launch initiatives such askaizen costing, pseudo-profit centers, TQM and reenginee