Cost Accounting

A system is a set of interdependent parts which together form a unitary whole that performs some functions. A number of sub systems make up the whole. In this context of the organization, a management information system may be seen as the overall system with a number of sub systems including the cost and management accounting system that provide the information to management for purposes of planning, organizing, directing and controlling the organization’s activities so as to achieve corporate goals including profit maximization.

Information must be collected, processed and communicated in an organized manner if the objectives of the enterprise are to be efficiently implemented and alternative strategies for their implementations examined, so as to select the best strategy.

Information may be non mutually exclusive in nature. This means that information gathered as part of the management information system may be used in two or more subsystems for differing purposes. An example of this information is with regard to the amount and location of work in progress: (work in progress refers to partly completed units of products where a product passes through a number of operations and processes before being passed into finished goods store or to the customer). Work in progress information may be used by:

1. Production planning department in order to monitor the progress of parts of an order through the production process and to instigate action to speed up the completion of slow moving parts of the order
2. Quality control department in comparing one batch of product with another in highlighting the incidence of process losses and their location
3. Cost management department in the quantification and valuation of actual loses as compared to the level originally allowed for in the business plan
4. Financial accounting department in the valuation of work in progress for balance sheet purposes and for purposes of determining the cost of sales in the income statement.

Business Management involves planning, organizing, staffing, directing and controlling an organization’s activities so as to meet a specified objective, usually profit maximization. The function of managing a business’s activities is entrusted to the managers of the business. For the managers to maximize profits, they must minimize the entire business’s cots. They therefore need to track all costs as they are incurred and recovered via the organization’s activities. To get this information as it happens (LIVE), they need an effective an efficient ‘information system’ referred to as cost accounting. It will therefore be appreciated that if an organization’s cost accounting information system fails, the managers cannot manage it efficiently and effectively.

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