With the continuing development of business processes, whether the change in various manufacturing processes, or the automation of most business activities, the cost accounting procedures that companies use to calculate for the unit cost of an individual product, service or activity have also become outdated. From a managerial accounting perspective, the changes in the economy, in industries and individual firms alike, must be supported by the firm's accounting and control infrastructure (Bromwich & Bhimani 1994). Accounting is, after all, a financial model of business. When changes occur in the business, accounting should change to reflect them. Managers of companies that fail to make appropriate modifications in their accounting systems will find they have inaccurate product/service/activity cost figures and lack data for making decisions. They may lose their competitive edge because they do not have the necessary information for operating in the constantly changing business environment. Systems for accounting for costs date back several centuries. Cheatham & Cheatham pointed out that cost systems were of greater concern to early merchants and craftsmen than what is now called financial accounting (1993). When there were no income taxes or regulatory government agencies to demand the preparation of financial statements, all accounting were managerial accounting -- accounting done for management to meet its information needs. One basic difficulty in costing is that an individual product, service or activity does not drive all the company expenses. Even within a factory, there are many questionable costs, not directly driven by the type, number or volume of products. In addition, there are costs that are driven by substantial material vendors and customers. This paper presents suggestions on how to go about calculating the unit cost of an individual product, service or activity, in par with the marked changes in the field of management accounting to maximise the benefits that effective costing has to offer.
At the turn of the twentieth century, the most important dimension of management control was cost control. Innovations in management accounting such as activity-based costing, capacity cost management, balanced scorecard, and target costing have emerged and, to a limited extent, they have affected the design of management accounting systems in many enterprises (Gosselin 1997; Guilding, Cravens & Tayles 2000). In all cost accounting activities that help shape management accounting decisions made by the company, identification of the components of the cost being calculated should be listed to account for all that matters to the computation. In production, such cost items as manpower, raw materials, electricity, transport, rent, water, machinery, equipment, tools, etc. should be included in the computation, in order to come up with the cost as close as the amount of resources that the firm has spent. In the management area, manpower and the entrepreneur’s salary form part of costing, as well as other costs expended for making the business run. Most companies view cost per unit as ‘labour per unit’. This can be very deceptive when each unit consumes its share of overhead, maintenance, machine wear, raw material, etc. In selling and finance, cost items as publicity, promotion, commissions, interests, etc. should form part of the costing activity. In all these business aspects, there are two kinds of mistakes that could be made in accounting costs: cost measures that should be ignored have been included; or, ignoring costs that should be included. As a rule, costs that will not vary as a result of a decision should be ignored; and all costs that will vary as a result of a decision should be included.
The advent of technology in the manufacturing industry, the recently formulated taxation policies, surfacing novel lines of expertise, new business processes, growing number of participants in the supply chain and the ever-changing rules, improved accounting systems and regulations of global trade are some of the more immediate additions that should be considered in the computation of the unit cost of an individual product, service or activity. Atrill & McLaney 1997 also observed that changes have taken place in the industry between the time the system was developed and the 1990s: (1) from direct labour-intensive and direct labour-paced to capital-intensive and machine-paced production; (2) from a low level of overheads to a high level overheads relative to direct costs; and (3) from a relatively uncompetitive to a highly competitive international market. Fixed and variable costs are affected by these marked developments in the business field, and it is only through an initial correct identification of the fixed and variable costs that a calculation of the said cost per unit of each of its products, services and activities commence.
Job costing, as an integral part of the cost accounting system, should include the preparation of source documents (materials used to accumulate the costs for an individual job) such as the job cost sheet, entering of the information in a journal (book of initial entry) and the determination of overhead rates. According to Khan (2000), the simplest way to calculate a predetermined overhead cost is to divide the estimated overhead for, say an entire year, by an appropriate base, such as direct material hours, direct labor hours, etc. While the method is simple, there is a problem with it in that if the agency budget constitutes an unusually large (or small) fraction of the total budget, it may overestimate (or underestimate) the overhead allocation. Also, when money is frequently transferred between funds, it may misrepresent the overhead allocation by the amount of the transfer. The alternative is to remove the effects of interfund transfers before the method can be used. This costing facet should then be integrated in the computation of the cost per unit of a product, in order to more closely have an estimate of how an individual product, service or activity made use of a particular job in the firm. As there is a marked increase in the specialisation of jobs and a different rate apply to them, it is important that they, too, be included in job costing, noting the difference between the them and standard work performed for a product, a service or an activity, and taking them into consideration when making costing decisions. In process costing, an equally vital aspect of cost accounting, the weighted average method or the first-in first out (FIFO) approach can be used to determine number of equivalent units in an inventory. Once the number of equivalent units in an inventory is known, the computation of the cost of total equivalent units as well as the cost per equivalent unit for a department can ensue, more known as the cost analysis schedule. The procedures for calculating these costs are quite simple: the former is obtained by simply adding all the costs in an inventory, whereas the latter is obtained by dividing the total cost by the number of equivalent units (Khan 2000). This costing phase should also be integrated in unit costing, as the product, service or activity is, in one way or another, involved in various business processes. The drawback to including process costing in calculating for unit cost is that it complicates the whole process of unit cot computation, since a separate set of schedules will have to be prepared for each business department and the corresponding work in process will have to be reconciled in the final account. As various high technology processes have cropped up over time, adjustments for previous process costing computations should be made. As computation of the cots per unit depends on the nature of the business that one is engaged in, there are different items that need to be considered in its calculation. As such, the process costs and job costs are two integral parts of the computation.
Management accounting systems are designed to supply information to internal decision makers of a given organization, to facilitate their decision making, to motivate their actions and behaviour in a desirable direction, and to promote the efficiency of the organisation (Riahi-Belkaoui 1992). The cost accounting system of a firm largely helps shape the decisions made by management accountants. An exposure to either a proliferation of courses in the computer, quantitative, and behavioural sciences, or to an integrated multidisciplinary approach would be supportive to advocating up-to-date cost accounting procedures to cope up with the demands of the ever-changing business environment. As
(1999: 18) claimed that “In fact there is no single correct cost figure”. Product costs are always calculated from the financial transaction data of the cost centres of the organization. Several methods exist, and each company uses a method of its own. It should therefore be noted that a host of possible cost accounting systems can be designed from the various combinations of the already existing cost accounting systems, although not all of the alternatives are compatible. Selecting one part from each category should provide a basis for developing an operational definition of a specific cost accounting system. Walker
During the past decade cost accounting has come under vigorous attack on the grounds that traditional approaches to allocating costs are fraught with considerable arbitrariness and contain substantial errors which can lead to misguided decisions dealing with such matters as pricing, outsourcing, capacity planning, and profitability analysis for various product lines and other segments of business activity. The above suggestions for cost per unit calculations would be useful for decision-making processes to be made by the administration as a whole or the accounting department in itself. Recognising that there are limitations to such method, it is best that cost accounting systems be combined with one or the other in order to produce the most fitting for the organisa