Exploring the functions of cost systems
Costing is an important process, which many companies slot in to keep track of where their money is being spent in the production and distribution process. (Process Costing, 2011)
Accounting system was established to oversee the company's costs and provide information on the operation and performance management. (Costing System Definition, 2011)
Cost accounting system is a more extensive accounting treatment used by the organization of the system components. Costing system's main function is to maintain the expenditure of a particular organization. Whereas the data that is gathered and generated by the costing system is also incorporated into the overall accounting system, the costing approach allows for easy origin of the data for reports to the upper management.
Considered the information gathered by the cost accounting system enables managers to identify the two success factors that is related to the company's critical of the current situation. Operational costs are the establishment of data composed by a costing system. The management is able to get all expenditures that are straightforwardly associated with the general function of the organization, especially in terms of production costs. (Costing System, 2011)
Traditional and Modern Costing System
Traditional Costing System
Traditional costing system is any of the methodical costing methods that prevailed before the rise of activity-based costing. It is because they rely on a fundamentally illogical provision of indirect costs; such systems do not give managers exact product cost information, which means that exact result of product prosperity is not possible. The overhead rate in a traditional costing system would classically be calculated using direct labor hours, machine hours, or units. This could lead to exact product costs. (Traditional costing system)
Traditional costing is also a costing system that does not segregate cost by occupation or allotment or even by each part of the manufacturing process. It takes a total cost and divides it by each part of the process. Fundamentally each part of the manufacturing process is assigned an equal predictable cost. (Traditional costing system. 2011)
The strengths of traditional costing systems are:
Straightforwardness - the computation of overhead rates is moderately undemanding;
They are commonly understood in the business;
They are not luxurious to function;
They are still being used after many decades.
The weaknesses of traditional costing systems are:
Their dependence on illogical rather thanÂ cause-and-effect allocationÂ of overheads;
Their incapability to give exact product costs in multiproduct companies;
Their breakdown to analyze non-manufacturing costs.
(Definition of traditional costing system, 2011)
Modern Costing System
Modern costing divided into three costing which are:
It focuses on target cost per unit, which is the predictable unit cost at a product that when it sold at the target price, enables organization to earn the target profit per unit. (Current Cost Accounting Methods,Â 2011)
As an alternative of a single allotment base, uses separate indirect cost rates for each department. It supposes that each department has different allotment base. (Current Cost Accounting Methods,Â 2011)
It is a method for calculating object costs, in the way that overhead, selling, general and administrative costs assigned to an object reveal the overhead services actually enthusiastic by the object. (Current Cost Accounting Methods,Â 2011)
Why Modern Costing?
Many factors like convolution of the production process, regularity of operation at competence, or the nature of antagonism, must be taken into account when deciding what cost system a company will implement.Â In order to establish what types of cost systems U.S. manufacturing companies use and to observe the differences, if any, in the information generated from them, a study was conducted on finance and accounting professionals. (Management and accounting, 2011)
A substantial proportion of product costs come from the overhead that is owed to that product, but based on the costing system used, the amount owed can differ to a great extent due to the fact that the dissimilar costing systems apportion overhead in very different ways.Â The traditional costing system uses a simple measure, such as machine hours, to apportion overhead, ABC uses cost pools and cost drivers to allocate overhead costs based on usage.Â Â In theÂ traditional viewÂ andÂ ABCÂ cost systemsÂ for allÂ variable costsÂ in theÂ long run,Â will beÂ allocatedÂ in a number ofÂ products. (Management and accounting, 2011)
Activity-based costing is characteristically intended to meet management decision making needs; fundamental associations exist between overhead portion and product usage, and criticized for not linked to quality and delivery strategies. (Management and accounting, 2011)
Cost accounting system is a more extensive accounting system used by an organization. The main function of the cost of computing systems is to maintain the expenditure of the company. Although this is the collection and costing system to produce the data also integrated into the overall accounting system, the cost is calculated to allow easy extraction of data toupper management personnel.
Cost accounting system is usually considered information collected by the owners and managers o identify the two factors that are related to the company's current situation. Operational costs are frequently the basis of the data composed by a costing system. Management is able to get all expenditures that are straightforwardly linked with the general operation of the organization, especially in terms of production costs. (Costing System, 2011)
List of References
Process Costing: Types of Accounting Costing Systems, 2011. [ONLINE] Available at: http://www.suite101.com/content/process-costing-a52142. [Accessed 13 March 2011].
Costing System Definition, 2011 [ONLINE] Available at: http://www.investorwords.com/1152/Costing_System.html. [Accessed 13 March 2011].
What is a Costing System?, 2011 [ONLINE] Available at: http://www.wisegeek.com/what-is-a-costing-system.htm. [Accessed 13 March 2011].
Traditional costing system, Definition of traditional costing system, HighBeam.com: [ONLINE] Dictionary. [ONLINE] Available at: http://www.highbeam.com/doc/1O18-traditionalcostingsystem.html. [Accessed 13 March 2011].
Answers.com - What is a traditional costing system, 2011 [ONLINE] Available at: http://wiki.answers.com/Q/What_is_a_traditional_costing_system. [Accessed 13 March 2011].
Traditional costing system - Dictionary definition of traditional costing system, Encyclopedia.com: FREE online dictionary, 2011 [ONLINE] Available at:Â http://www.encyclopedia.com/doc/1O18-traditionalcostingsystem.html. [Accessed 13 March 2011].
Current Cost Accounting Methods,Â 2011 [ONLINE] Available at: http://docs.google.com/viewer?a=v&q=cache:zv-2-4WJLGMJ:www3.ekf.tuke.sk/konfera2008/zbornik/files/prezentacie/rac_livia.ppt+Modern+Costing+System&hl=en&gl=my&pid=bl&srcid=ADGEESi17ltD5b5_DG3QQbx5v6_U3XA4qKJqCJYj1mnStPFmDTqymjZ4gp1u7wMNlb-mp-oCL_VKmUL_ob5JHHkQvKpGvdZOQtmvNgxu-4aBs8m9C513cWmwUoDRkbWxic-Wg0CTcyjy&sig=AHIEtbRQiRlxaWNEVi_TTVA4OZ_TmqElmw. [Accessed 13 March 2011].
Management and accounting, 2011 [ONLINE] Available at: http://maaw.info/ArticleSummaries/ArtSumHughesGjerde03.htm. [Accessed 13 March 2011].
Just-in-timeÂ is an inventory system where raw materials are delivered on time before they are required on the assemblage line, and finished goods are contrived before they are shipped to customers. Just-in-time enhances return onÂ speculationÂ by considerably reducing overhead cost, restraining quality inspections, and eliminating superseded stock. Just-in-time does engender significant risk. However under just-in-time systems, manufacture stops when parts aren't send on schedule and enormous bottlenecks are created. Thus successful just-in-time manufacturing requires both superior management and a exceedingly disciplined workforce. Just-in-time is personally linked with methods introduced and developed by the Toyota Motor Company of Japan and copied by manufacturers throughout the world. However, just-in-time is simply one component of the widespread Toyota Production System, which attempts to exterminate waste of all kind. (Just-in-time Definition, 2011)
JIT is a tactic for inventory management in which raw materials and components are delivered from the seller or supplier instantaneously before they are needed in the manufacturing process. (Definition and Meaning, 2011)
Companies purchase materials and produce units only as needed to meet actual customers demand using Just in Time (JIT) manufacturing and inventory control system. Inventories are reduced to the minimum and in some cases isÂ zero in just in time manufacturing system. Both manufacturing and merchandising companies used JIT approach. It has the most philosophical effects, however, on the operations of manufacturing companies which maintain raw material,Â Work in process, andÂ finished goods the three classes of inventories. Conventionally, manufacturing companies have maintained all three types of inventories to operate as buffers so that operations can carry on efficiently even if there are unforeseen disruptions.Â Raw materialsÂ inventories offer indemnity in case of late deliveries from. Â Work in processÂ inventories are maintained in case a work station is incapable to function due to a crash or other reason.Â Finished goodsÂ inventories are maintained to accommodate unforeseen fluctuations in demand. These inventories provide buffers against unforeseen events. In addition to the money tied up in the inventories, authority dispute that the charisma of inventories encourages incompetent and careless work, results in too many defects, and spectacularly increase the amount of time requisite to comprehensive a product. (JIT Manufacturing-Inventory Control System, 2011)
JIT purchasing is also the receipt of materials just when it is needed for production. The production process is organized in a way that enough raw materials, work in process, finished goods, parts and components arrive at the plant when it is ready to be used, not too early and not too late. JIT purchasing aims to eliminate wastage from manufacturing activities reduce stock to zero, achieve a continuous flow of production and eliminate or minimize non value-added activities. (bk pg44-45)
Advantages and Disadvantages
The main benefit ofÂ JIT can improve production efficiency. The advantages of JIT are as the following:
Lower stock holding means a diminution in storeroom which saves rent and insurance costs
Less working capital is tied up as the stock is only obtained when it is required
There is less probability of stock inclement, becoming out of date
Avoids the upsurge of unsold finished product that can happen with unexpected changes in demand
Less time is exhausted on examination and re-working the product of others as the prominence is on getting the workÂ right first time
(Just in time production, 2011)
Long term partnership established with few suppliers
Savings in time due to fewer suppliers to deal with
Products spend less time on the shelves before sale
Quality control at source
Increase efficiency and productivity
Reduces administrative and paperwork
Reduces investment in inventories (BK pg48)
PCs Just In Time Management:
Del Computer Corporation has finally tuned its Just-in-Time system so that an regulate for a personalized personal computer that comes in over the internet at 9am can be on a delivery truck to the customer by 9 P.M. In accumulation, Dell's low cost production system allows it to under price its rivals by 10% to 15%. This incorporation has made Dell the aspiration of the personal computer industry and has enabled the company to grow at five times the industry rate. While machines from Compaq and IBM can languish on dealer shelves for two months Dell does not start ordering components and assembling computers until an order is booked as the price of PC parts can fall rapidly in just a few months. By ordering right before assembly, Dell figures it s parts, on average, are 60 days newer than those in an IBM or Compaq machine sold at the same time. That can translate into a 6% profit advantage in components alone. (JIT Manufacturing-Inventory Control System, 2011)
Implementing thorough JIT procedures can engage a most important overhaul of your business systems that it may be complicated and costly to initiate. The disadvantages are as below:
Little room for making mistakes as minimal stock is reserved for re-working defective product
Construction is very contingent on suppliers and if stock is not delivered on time, the whole production agenda can be deferred
No unused finished product obtainable to meet unforeseen orders, because all products are made to meet actual orders. However, JIT is a very approachable method of production
(Just in time production, 2011)
Toyota the Developer of JIT System:
Just-in-time manufacturing system has many advantages, but they are defenseless to unforeseen disruptions in supply. A production line can quickly come to a arrest if necessary parts are out of stock.Â Toyota, the developer of JIT, found this out the hard way. A fire at AisinÂ seiki Company'sÂ plant in Aichi Prefecture stopped the delivery of all break parts to Toyota one Saturday. Toyota had to close down all of its Japanese assembly line by Tuesday. Toyota had lost an estimated $15 billion in sales, by the time the supply of brake parts had been restored. (JIT Manufacturing-Inventory Control System, 2011)
JIT applied into a car manufacturing business
JIT purchasing aims to eliminate wastage from manufacturing activities reduce stock to zero, achieve a continuous flow of production and eliminate or minimize non value-added activities.
In JIT purchasing the buyer must identify and develop close relationships with a few suppliers.
Besides, buyers buy regularly over the long term to assure the supplier of sales that allow the supplier to plan for the purchase of material, components, parts and special purpose machines. Buyers also must inform the supplier of long term requirements which enables the supplier to plan his investment in inventory.
Then, the buyer gives one or more suppliers a copy of production schedule.
Furthermore, supplier will guarantees the quality of the materials before they deliver through quality inspection at source.
Moreover, supplier will ensures shorter lead time. Zero lead time is an ideal. Then there would not be a need to hold any safety stocks.
Lastly, the materials are used in the production immediately after the delivery of parts.
JIT purchasing is a receipt of materials just when it is needed for production. (BK pg408) JIT overcomes the weaknesses of economic order quantity. JIT purchasing also involves small and frequent purchases, timely delivery through good relationship with suppliers, quantity control at source, quantity purchase, almost no stock is carried, smoother workflow and substantial cost reduction. (BK pg50)
Consequently ofÂ advantages, every year more companies are accomplishmentÂ just-in-time (JIT) manufacturing system. Most companies find that merely plummeting inventories is not enough but to linger competitive in an ever changing and ever competitive business environment, must struggle for incessant upgrading. (JIT Manufacturing-Inventory Control System, 2011)
Lastly, JIT also opens businesses to a number of risks, conspicuouslyÂ those connected with your supply chain. SinceÂ there is no stockÂ to fall back on, a slight disturbance inÂ supplies to your business from just one supplier could force manufacture to stop at very short notice. (JIT Manufacturing-Inventory Control System, 2011)
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