School of Business

The Bottom Line - Victim of Cost Accounting

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Description: The cost accounting system is the main force behind product related decisions. To be relevant, product costs must be properly allocated. Studies have shown that the most common characteristic among all managerial accounting companies in the field was that they employed a 2-step cost allocation system. Most use only one system of cost allocation; however, the systems used today are outdated, are not supported by practical theory, and do not operate with a well defined concept of the relevant information required. To update them, the problems to be considered include: 1. the relevance of direct labor hours, 2. setup costs, 3. reliance on volume, and 4. an external focus on the cost system. In the future, managers may want to use more than one allocation base simultaneously. These new cost accounting systems must be ready to handle various changes without distorting a company's costs or profits. Managerial accountants should look to outsiders for help in the final design of their cost accounting system. Firms must be willing to explore the realm of possibilities that lie ahead in this area.
Language: English
Format: Article