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domingo, 25 de junho de 2023

Improving Cost Accounting Systems: Addressing Common Mistakes and the Need for Practical Knowledge

Improving Cost Accounting Systems: Addressing Common Mistakes and the Need for Practical Knowledge

Introduction

Cost Accounting Systems play a vital role in cost control and optimization for organizations. Despite the availability of advanced approaches like Target Costing, Strategic Costs, and Activity Based Costing, these systems often fall short in providing optimal conditions for cost management. In this article, we will discuss the four biggest mistakes commonly observed in Cost Accounting Systems and emphasize the need for practical knowledge and firsthand experience in their development. We will draw insights from experts such as Robert S. Kaplan and Peter Drucker to shed light on the importance of understanding the ground realities of cost generation processes.

Mistake 1: Lack of Focus on Cost Causes

One major flaw in many Cost Accounting Systems is the limited emphasis on the causes of costs, instead focusing primarily on the consequences. Costs are not isolated figures but are influenced by various processes and sub-processes involved in production. Factors such as setup procedures, production planning quality, raw material quality, preventive and predictive maintenance, idle capacity, and others determine the final costs. Kaplan (2005) emphasizes the significance of understanding cost drivers and addressing them at their root cause for effective cost control.

Mistake 2: Excessive Focus on Processing Costs

Another common mistake made by Cost Accounting System managers is an overemphasis on processing costs, including labor, indirect labor, and other overhead costs. Many traditional cost systems fail to adequately address several other categories of costs, such as raw materials, packaging, quality and non-quality costs, maintenance costs, outsourced services, logistics, and transportation. Drucker (1999) emphasizes the importance of considering all cost components comprehensively to gain a holistic view of the cost structure.

Mistake 3: Insufficient Emphasis on Non-Financial Indicators

Accounting cost systems often concentrate solely on financial values, disregarding non-financial indicators and other determining factors that impact costs. While financial values are essential, a thorough evaluation of non-financial indicators is crucial for effective cost control and optimization. Factors such as production volume, production performance, overall equipment efficiency (OEE), idle capacity, and scrap rates provide valuable insights into cost management. Kaplan and Norton (1992) advocate for the balanced use of financial and non-financial measures in their Balanced Scorecard approach.

Mistake 4: Lack of Ground-Level Engagement

A prevalent mistake made by accounting cost bureaucrats is their disconnection from the actual place where costs occur. Spending years solely on cost calculations without visiting and observing the cost generation processes hampers a comprehensive understanding of the factors influencing costs. For manufacturing companies, frequent contact with the shop floor is crucial, as it allows for firsthand knowledge of the production processes. Moreover, engaging with suppliers and customers provides valuable insights into cost drivers across the value chain. Kaplan and Anderson (2004) stress the importance of direct contact with processes and agents involved in cost generation to gain a deeper understanding of the underlying cost dynamics.

Conclusion

Cost Accounting Systems, despite their adoption of advanced approaches, often fail to deliver effective cost control and optimization due to several common mistakes. The lack of focus on cost causes, excessive emphasis on processing costs, insufficient consideration of non-financial indicators, and the absence of ground-level engagement are significant shortcomings. To overcome these challenges, it is crucial for authors and developers of cost accounting literature to possess practical knowledge and hands-on experience with the operational aspects of organizations. As Kaplan (1983) aptly stated, "Knowledge is useless unless it is applied to practical activities." By integrating practical insights into cost accounting practices, organizations can achieve enhanced cost control and optimization, leading to improved overall performance.

Drucker, P. F. (1999). Management Challenges for the 21st Century. HarperBusiness.

Kaplan, R. S. (1983). Measuring manufacturing performance: a new challenge for managerial accounting research. The Accounting Review, 58(4), 686-705.

Kaplan, R. S. (2005). The strategy-focused organization: how balanced scorecard companies thrive in the new business environment. Harvard Business Press.

Kaplan, R. S., & Anderson, S. R. (2004). Time-driven activity-based costing. Harvard Business Review, 82(11), 131-138.

Kaplan, R. S., & Norton, D. P. (1992). The balanced scorecard: measures that drive performance. Harvard Business Review, 70(1), 71-79.


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