Cost Accounting

Assignment’s topic: Why cost accounting and management accounting

Submitted to prof: Ahmed Farghaly

Submitted by: Martina Nabil Saad

Introduction

The importance of cost and management accounting practices has increased

more than ever. The reasons for this are the domestic and global competition
getting severer by globalization, decreasing profit margins, increasing input
prices due the tightening energy sources, economic crises etc. Therefore,
companies operating in developing countries have also begun to implement
cost and management accounting practices which were first adopted by
companies operating in developed countries. Parallel to these developments,
research studies which have been conducted initially in developed countries
are followed by the studies conducted in developing countries. (Ali UYAR

2010 p.114)1.

Purpose of Cost and Management Accounting

Information is required to run any type of organization successfully. A

considerable proportion of this information will be financial. The purpose of
cost and management accounting is to provide financial information to
managers that will help them to plan the activities, control the activities for
which they are responsible and see the financial implications of any decisions
they may take. If cost and management accounting does not make a useful
contribution to the management of the organization, it is of no value and
should not be undertaken. Providing detailed cost and management
accounting information incurs costs in the collection and analysis of data, but
experience shows that if properly applied, the techniques and methods of cost
and management accounting make a significant contribution to effective
management. The activities of managers can be divided into three main
functions to which cost and management accounting makes a contribution.
The first is concerned with the control of the organization, both on a day-to-
day basis and longer-term. The second function is concerned with planning
for the future and setting policies to ensure the success of the enterprise. Third
(Decision-Making), managers are concerned with looking at alternative
courses of action open to them and deciding which is the preferred course (Jill
Collis & Roger Hussey,1999, p.p1-4)2

Importance of cost and management accounting

Changes in the global business environment have driven transformation in the

direction of sustainability by focusing on cost efficiency. Management
accounting literature continues to suggest that there are benefits in adopting
management accounting practices in improving business sustainability. Such
literature also proposes that management accounting practices provide various
tools, techniques and valuable internal information, including details for
budgeting, profit planning, and performance evaluation. It is also shaped by
management accounting information system (Azudin & Mansor, 2018,
p.222)3.

(Waweru, Houge, and Uliana,2005, p.227)4 state that the effect of the market
economy, intensified competition, globalization, limited resources, change
and complexity in the business environment, and accelerating technological
changes drive organizations to realize the need to have objective information.
These factors also make them aware of the need for more detailed cost and
management information. Managers have the responsibility to continuously
ensure that their organizations can compete nationally and internationally in
order to remain sustainable in the market (Sunarni, 2013, p.618)5.
This is a statement supported by (Johnson & Kaplan ,1987, p.4)6 who state:
with vigorous global competition, rapid progress in product and process
technology, and wide fluctuations in currency exchange rates and raw material
prices, an organization's management accounting system must provide timely
and accurate information to facilitate efforts to control costs, to measure and
improve productivity, and to devise improved production processes

The same authors add:

The management accounting system must also report accurate product costs
so that pricing decisions, introduction of new products, abandonment of
obsolete products, and response to rival products can be made with the best
possible information on product resource demands (Johnson & Kaplan, 1987,
p4)6.

In recent years most organizations have faced dramatic changes in their

business environment. Such changes like deregulation, increasing levels in
global competition, and reductions in product life cycles arising from
technological innovations have intensified the challenges for managers.
Considerable changes have also taken place within the manufacturing
environment with the emergence of advanced manufacturing technologies
that have resulted in greater automation and changes in cost structure
involving direct labour costs being replaced by overhead costs. New
management practices have also emerged, such as the just-in-time
management philosophy, lean production techniques, and total quality
management practices (Al-Omiri & Drury, 2007, p.404)7.

Public management reforms and decisions on cost and management

accounting changes are influenced by the task environment and the political–
administrative system that features public organizations. Drawing on different
theoretical approaches, some scholars assume that the success of the new
accounting and management systems firstly depends on the support and
capacity for the implementation process where the environment, the
organizational structure, the technology and the managerial decision-making
styles introduce divergences in the systems’ design with an impact on success
and organizational performance. On the other hand, other scholars regard
accounting as a social and institutional practice that influences and is
influenced by organizational changes. In this line, accounting practices are
adopted as a way to obtain legitimacy and external support, without effective
changes to their technical activities (Carvalho, J. B. D. C., Gomes, P. S., &
José Fernandes, M, 2012, p.307) 8.

Cost and Management Accounting Practices

In a study conducted on 40 industrial companies in Egypt concluded that cost

accounting information in Egypt is available at a basic level, and used more
for external (pricing) purposes than for internal (performance) purposes. They
also found that the use of advanced cost accounting techniques such as
activity-based costing system seem absent. (Van Triest and Elshahat,2007,
p.330)9.

The comparative study conducted by (Joshi,2001, p.100)10 revealed that

Indian manufacturing companies rely heavily on the traditional management
accounting techniques such as variable costing, budget for day-to-day
operations, capital budgeting tools, return on investment-based performance
evaluation, and performance evaluation.
However, the adoption rates of recently developed practices such as
shareholders’ value analysis, performance evaluation (qualitative measures),
product life cycle costing, back flush costing, activity-based budgeting, value
chain analysis, benchmarking and balanced scorecard, have been rather low
and slow.
References

1) Ali, U. Y. A. R. (2010). Cost and management accounting practices: a

survey of manufacturing companies. Eurasian Journal of Business and
Economics, 3(6), 113-125.
2) Collis, J., Hussey, R., Collis, J., & Hussey, R. (1999). Cost and
Management Accounting in Context. Cost and Management Accounting,
184-192.
3) Azudin, A., & Mansor, N. (2018). Management accounting practices of
SMEs: The impact of organizational DNA, business potential and
operational technology. Asia Pacific Management Review, 23(3), 222-
226.
4) Waweru, N. M., Hoque, Z., & Uliana, E. (2005). A survey of management
accounting practices in South Africa. International Journal of Accounting,
Auditing and Performance Evaluation, 2(3), 226-263.
5) Sunarni, C. W. (2013). Management accounting practices and the role of
management accountant: Evidence from manufacturing companies
throughout Yogyakarta, Indonesia. Review Integrative Business &
Economics Research, 2(2), 616-626.
6) Johnson, H. T., & Kaplan, R. S. (1987). The rise and fall of management
accounting. IEEE Engineering Management Review, 3(15), 36-44.
7) Al-Omiri, M., & Drury, C. (2007). A survey of factors influencing the
choice of product costing systems in UK organizations. Management
accounting research, 18(4), 399-424.
8) Carvalho, J. B. D. C., Gomes, P. S., & José Fernandes, M. (2012). The
main determinants of the use of the cost accounting system in Portuguese
local government. Financial Accountability & Management, 28(3), 306-
334.
9) van Triest, S., & Fathy Elshahat, M. (2007). The use of costing information
in Egypt: a research note. Journal of Accounting & Organizational
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10) Joshi, P. L. (2001). The international diffusion of new management
accounting practices: the case of India. Journal of International
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