Acounting and finance Essay Example | Topics and Well Written Essays - 1250 words

Acounting and finance - Essay Example To efficiently administer the various functional areas for which the manager is responsible and also to co ordinate these functions and activities within the overall framework of an organization is the two major purpose of an accounting system Especially the management accounting systems contemplate to analytically measure and report all financial and non-financial information so that the managers can make fruitful and effective decisions to fulfill the goals of an organisation. Thus the focus of the management accounting is mainly internal reporting of the various activities. Modern day management accounting plays a very significant role in both planning and control decisions. Hence in the process of decision making the management accountant has to make a number of realistic and logical assumptions in arriving at an optimal solution for the problem on hand. For enabling the management accountant to take a stand on the various assumptions in the process of decision making, the cost o f the product or service is a key element. Traditionally there are various methods of ascertaining the cost of a particular product or service. One of such methods is collecting the various cost elements and allocating them to the particular product or service which is known as unit costing.As outlined above one of the traditional ways of ascertaining the cost is to apportion a standard cost for each unit based on historical cost data. This system of ascertaining costs and base the managerial decisions has lost significance due to the fact that modern companies tend to have lower truly variable costs as against a very high degree of fixed costs. Also the equipments that are being used have become more complex and specialized and they form a very significant proportion of total costs. In addition organization with a wide range of products has processes which are common to several finished items making cost allocation irrelevant or meaningless. 3.0 ALTERNATIVE TO TRADITIONAL COSTING SYSTEMS-ACTIVITY BASED COSTING SYSTEM (ABC SYSTEM) An alternative to the traditional costing systems, modern day multi process business corporations adopt the activity based costing system which has proved a real tool in the hands of the managers for making proper business decisions. The activity based costing system is a refinement of the costing system in which focus is centered on the individual activities as the fundamental cost objectives. An activity in an organization may take the form of an event, task or unit of work with a specified purpose. To illustrate; the design activity, set up activity, manufacturing operations, shipping activity, distribution activity and administrative activity can form the basic key costing elements for the refinement of the costing system and thereby to arrive at the proper cost of a particular unit or service. ABC system aims at calculating the costs of the individual activities and assign costs to cost objects such as products or services on the basis of the activities undertaken to produce each product or service. 3.1 FEATURES OF ABC SYSTEM OF COSTING Fundamentally there are three distinct features of the activity based costing system: They are: 1. ABC system works by creating smaller cost pools linked to different activities. Traditionally organizations used to have single overhead cost pool related to several cost pools. 2. For each activity-cost pool ABC system aims to measure the activity performed and have this as the base. 3. In some cases costs in a cost pool can be identified and traced back to a particular Product or department or service and such kind of direct tracing of costs improve the cost accuracy as no assumptions are made to allocate the common costs. The logic behind the working of the ABC system of costing is that the more we create finely structured activity-cost pools, greater is the