Using Cost Accounting Information to Enhance Firm’s Competitive Position and Performance

Cost history in Theory The last two decades has seen a revolution in focal point score theory and practice due to the challenges of the agonistic environment in the 1980s. Kaplan and Johnson (1987) identified the failings and obsolescence of existing follow and instruction execution measurement dodges, which led to the re-examination of traditional cost be and wariness moderate systems. Conventional monetary and talk termsment business relationship methods eat developed in the main as a result of corporate legislation in the thirties forcing companies to provide internationally published financial accounts. forethought accounting is in general foc intentd as a decisiveness making tool for caterpillar track a business, hence they require more flexibility. According to Kaplan, counsel accounts shit become a subset of financial accounts and that they reflect more on the external rather than internal requirements of the attach to. Most of the managerial decision- making and stamp down systems in use in the late 1980s were described by Johnson and Kaplan as stagnant. As a result, they went onto research in new accounting systems raising the indite of internal accounting systems by use of financial and non-financial measures.Although their work was at first seen as controversial, it is now considered of key importance for companies aiming to enhance their rivalrous property and performance. The purpose of cost accounting is to ascertain the be of point of intersectionions and work. When right on implemented, the cost accounting function bequeath provide necessary instruction for pricing decisions, identify the meshability of each product, service, or job, aid management in maximizing advantages by detecting sources of wastages and excess capacity, and bottom of the inning play management behaviour.In theory, cost accounting help managers necessitate decisions to fulfill an constitutions goals. Cost story in drill However, according to a July 2003 study done by the Institute of Management Accountants and Ernst and Young, 98% of managers believe their cost data is distorted while approximately 40% believe their cost data is signifi basetly distorted. In practice, about companies still use the same cost accounting and management control systems that were developed decades ago in a agonistical environment drastically different from today.In the galore(postnominal) cases worked on throughout the semester in history Planning & Control, for example Putz, Seligram Inc. and Zytec, there was an rudimentary problem of inaccurate cost breeding that failed management when making decisions. This was due to the traditional cost systems that these companies employ despite the changing nature of their business environment. One of the main triggers that a alliance will need a new cost system is when changes occur in the organization and its environment. The clause You need a new cost system when highlights t he many signals in which a company demand to redesign or make water a new cost system.This article proposes that a cost system must be up to assure and functioning properly in purchase order for the theory of cost accounting to be applied in practice. The problem with the state of the accounting business is the skewed emphasis towards monetary invoice, as identified by Kaplan. Financial Accounting is used to prep ar financial statements for external users. These Financial Accounting reports atomic number 18 for outsiders to treasure the business, but the reports focus on compliance with generally accepted accounting principles in broad totals and are not designed to support decision making.Despite this fact, 80% of organizations assert on the GAAP required practice Costing method to provide management with reports (Sharman and Mackie 12). When management reports echo measuring rod financial reports, management loses. These reports have no activity data and lots require managers to prepare their own ad hoc reports when they require decision analysis. These financial reports are difficult to understand by non-accountants and do little to knock over managers the breeding they should have at their fingertips to run a company. The Management Accounting problem in this country does not seem to be as problematic in other countries.According to the Sharman and Vikas article in the declination 2004 Strategic Finance German companies employ conscionable as many Managerial Accountants as Financial Accountants The U. S. employs one-tenth the number of practicing Management Accountants than the U. K. , Canada, and Germany. The clean emphasis on Management Accounting and providing information to managers to run a company is partly caused by the overwhelming requirements external parties place on corporations. Companies lose sight that the most important viewers of company feedback are people inside the company.State- of the Art Cost Accounting study to u praise Competitive Position Companies realizing the importance of internal reporting adopt progressive, or up to date cost accounting techniques, straying away from financial reporting and normal cost, in an attempt to accurately measure the costs of acquiring or using resources. This state-of-the- art cost accounting information enables management to supply- range for the consumer, and to enhance their firms competitive mail service and performance. In order for a company to enhance their competitive position, they must have an effective competitive strategy.The competitive strategy describes how an organization will debate and the opportunities its managers should seek and pursue. There are two competitive strategies that companies can settle to implement cost- leadership or product differentiation. When companies adopt the cost-leadership strategy, they decide to exert a competitive usefulness in the marketplace by providing the outperform value at the lowest price. When companies adopt the product differentiation strategy, they convey to uphold their competitive advantage by offering unique products or services at higher prices than their competitors.According to the confrontation strategy, competitive advantage is not sustainable. This is a realistic view of competition by recognizing that competitors will quickly bring out similar products and match price changes. The underlying argument of the confrontation strategy is that firms must debate in toll of the survival triplet. The survival triplet consists of three strategic dimensions that characterize a product price/cost, quality, and functionality. These three dimensions are bounded by a minimum and maximum acceptable level which defines the survival zone.In order for firms to survive and remain competitive, firms must operate in their survival zone. With that beingness said, companies face continuous pressure to reduce the cost of the products or services they sell, or continuously improvi ng the consumers perception of quality as related to their competitors. To successfully implement such strategies, managers must have state-of-the-art cost accounting information that will allow firms to adopt rear end cost to enhance their competitive position.Being that managers have little influence over pricing, (the central theme of economics states that prices are determined by supply and demand), management must monitor costs to receive sought after profits. take costing is the allowable amount of cost that can be incurred on a product and still earn the required profit from that product (Ansari, Bell, Klammer, Lawrence). The article take aim Costing proposes that lead costing is curiously important at the design stage, where 70-80 percent of the costs of a product are committed.Hence, target costing is more than just a cost accounting technique it is an integral part of the comprehensive management process that aids management in decrease the overall products life-cyc le costs, helping an organization to survive in an change magnitudely competitive environment. Nonetheless, target costing is useful in pre-production as well as post production and has many advantages to allowing firms to uphold their competitive position. Target costing requires analysis on competitors products and the customers perception of their products, and uses this information to assess which particular customer segment of the market to target.This analysis done in target costing allows for companies to create products that adds value, in the eyes of the customer, while staying fore of the competition by identifying areas of utility based on the customers perceptions. Furthermore, target costing enhances a firms ability to uphold their competitive advantage. Target costing reinforces top-to-bottom commitment to process and product innovation and is aimed at identifying issues to be resolved, in order to sustain competitive advantage.Target costing helps to create a compa nys competitive future with market-driven management for calculating and manufacturing products to realise customer expectations and market price. Also, target costing identifies market opportunities that can be converted into real savings to achieve the best value rather than just simply the lowest cost. Target costing enhances competitive position in the ways aforementioned however, without state-of-the-art cost accounting information, target costing is impossible to achieve.State-of-the-art Cost Accounting Information Enhancing Performance State-of-the-art cost accounting information can in any case enhance a firms performance in the marketplace. In measuring a firms performance, a state-of-the-art accounting technique was developed by Kaplan and Norton called the equilibrate bill. The balanced scorecard translates an organizations mission and strategy into a set of performance measures that provides the model for implementing its strategy (Hongren). The balanced scorecard uses financial and non-financial measures to evaluate short-run and dogged haul performance.Key strategic nonfinancial and operational indicators measure adjustments that a company is making for the long-run. For example, an gain in quality, as measured by improvement in yields, signals a strong likelihood of higher sales and income in the future. By balancing the mix of financial and nonfinancial measures, the balanced scorecard brings managements attention to short-run and long-run performance. In for profit companies, the main goal of the balanced scorecard is to improve a companys financial performance. Non-financial measures simply mete out as leading indicators for hard-to-measure long run financial goals.Kaplan and Norton developed four purviews that firms should crumble to achieve performance levels that are necessary to act customer needs, compete effectively, and achieve financial goal the financial perspective, the customer perspective, the internal-business-process perspective, and the larn and increment perspective. The financial perspective focuses on increasing shareholder value. Measures of the financial perspective complicate ROI, ROCE, residual income, and EVA. By managing financial performance, managers are able to manage costs and unused capacity.This will enhance performance by increasing profitability of the firm. The customer perspective measures customer satisfaction and focuses on the importance of the customer on the business. This enhances performance by increasing the firms market share and overall customer satisfaction. This will enable firms to meet the future needs of customers and increase customer focus of sales on the organization. The internal-business process perspective focuses on the internal business processes that will meet the needs of customers. This area focuses on product design and innovation, improving strength and quality, and post-sales service.This perspective enhances performance by improving the cust omer-service process, identifying operational problems to improve quality, reducing delivery time, and improving manufacturing capabilities. The learning and growth perspective includes employee training, system capabilities, and employee motivation. Measures of learning and growth perspective include employee satisfaction, and employee training programs. This enhances performance by empowering the workforce, underdeveloped employees process skills, and enhancing system capabilities.By implementing an effective balanced scorecard, for-profit companies are able to motivate managers to take actions that result in improvements in financial performance. When financial and nonfinancial performance measures are properly linked, nonfinancial measures serve as indicators of lagging future financial performance. These indicators can aid management in improvements in future performance. Conclusion State-of-the-art cost accounting information allows for the implementation of modern cost accou nting techniques.Such techniques include target costing and the balanced scorecard. Target costing enhances competitive position and uses state-of-the-art cost information to identify activities that do not add value to the customer. Without modern cost accounting information, there will not be a breakdown of activities and their respective costs to assist managers in analyzing non-value added activities. Target costing relies on state-of-the-art cost accounting information to identify these non-value added activities that managers will eliminate to reduce costs, and uphold their competitive position.The balanced scorecard uses state-of-the-art cost accounting information to motivate managerial behaviours and enhance performance. Managers rewards are based on the financial perspective, which system of measurements rely on cost accounting information. Analysis of operating income, a metric of the financial perspective, depends on modern cost account information that accurately separ ates material costs and conversion costs to identify spending variances and efficacy variances, which aid management in future financial performance.State-of-the-art cost accounting information enhances a firms competitive position as well as their performance in the future by allowing the implementation of modern techniques. Focusing on internal reporting, and not just financial reporting will allow companies to adopt continuous improvement in dynamic, highly competitive environments, through techniques such as target costing and the balanced scorecard. Works cited Sharman, Paul A. and Kurt Vikas. Lessons from German Cost Accounting Strategic Finance. 2004, December. 28-35. Cooper, Robin. You Need a New Cost System When Harvard business organisation Review. 1989, January. 6 pages. Sharman, Paul and Brian Mackie Grenzplankostenrechnung (GPK) Notes from Institute of Management Accountants Annual Conference. www. imanet. org. 1-58. Ansari, Bell, Klammer, and Carol Lawrence. Target Costing Management Accounting, A Strategic Focus. McGraw-Hill Companies Inc. , 1997. Hongren, Datar, Foster, Rajan, and Christopher Ittner. Cost Accounting A Managerial Emphasis. Thirteenth edition. Pearson Education, Inc. New Jersey 2009. 462-485. Print