Cost Accounting Applied essay

In actuality, the accounting method is very important in terms of the stable financial performance and business development of contemporary organizations. In this regard, companies operating in the market should come prepared to possible challenges as they need to adapt their accounting system to changing business environment and requirements imposed on them by fiscal policies and regulatory bodies. At this point, it is possible to refer to the experience of CVP, a company operating in the wireless control systems industry, which attempts to enhance its accounting to improve its marketing and financial performance. In fact, accounting systems and methods can affect consistently the decision making process in the company. However, the company should be able to make right decisions to improve its performance and to define accounting methods to be used. Therefore, the application of effective accounting methods and systems depends on the capability of an organization to implement right and effective methods and systems, but organizations should be aware of the huge impact accounting has on their performance.

Cost allocation

Today, the cost allocation is very important for the effective financial performance of the company. The key point is to balance the cost allocation. The balanced cost allocation implies that costs are distributed between departments proportionally to their needs and contribution to the overall organizational performance. In this regard, it is worth mentioning the fact that the CVP focuses the allocation of its fixed costs on specific project purposes. In actuality, this means that the company attempts to develop its projects and fund each project effectively. At first glance, this approach to the allocation of fixed costs can work and bring success to the company. In fact, it is true that the funding of projects is crucial, especially if projects are successful and can bring considerable return on investments. On the other hand, it is obvious that the company cannot rely entirely on the projects, while its purposes and outcomes can fail to bring the expected benefits to the company. In other words, the company may fail in forecasting outcomes of projects they fund but the allocation of resources and fixed costs rely entirely on the purpose of projects. Therefore, the company will fund projects, which managers believe to be the most prospective. However, such a system of funding makes the company dependent on the changes in the business environment, situation in the market and the position of the company in the industry as well as the organizational performance and outcomes of the implementation of the project. In fact, the projects funded by the company may fail and the company has no real back-up because its fixed assets are not funded properly. Instead, the funds are dispersed among various projects. In such a situation, the company would better focus on funding the fixed assets and allocated resources on funding projects that bring not very high but stable profits because such projects are reliable and the level of risks of failure of such projects is low. Therefore, the company can rely on such projects and gain stable profits. In such a way, it is hardly possible to agree with such approach to the allocation of fixed costs.

In addition, the company allocates fixed costs on the single-purpose facilities that make the company quite rigid because the diversity and multifunctional facilities are more prospective compared to the single-purpose facilities. In this respect, it is worth mentioning the fact that the focus on multifunctional facilities will increase the flexibility of the company in case of changes in the business environment. As a result, the company will be less vulnerable to the negative impact of the economic crisis or deterioration of the situation in the industry.

In such a way, CVP focuses on specific projects to allocate financial resources. On the one hand, such approach is effective because it allows the company to concentrate its financial resources on specific projects which are working and can bring considerable benefits. On the other hand, departments that are not involved in those projects suffer from the lack of funding and many prospective projects may remain under-financed. The latter means that the company may fail to identify a highly prospective project, which has high risks but can bring considerable benefits. Instead, CVP focuses on reliable projects that have low risks but bring stable profits. Basically, such strategy allows the company to maintain stable performance but the company may face problems with catching its rivals, who may allocate resources proportionally to all departments and develop diverse and prospective projects.

Activity-based accounting and management and their impact on the competitive position of the company

Activity-based accounting and activity-based management are similar in their essence. Activity-based accounting is a costing methodology that identifies activities in the organization and assigns the cost of each activity with resources to all products and services according to the actual consumption by each activity. As for activity-based management, this method of management is grounded on the management of specific activities and related processes (Fama and French, 1992). For instance, in case of CVP, the company can apply activity-based management to the specific project, such as the development of DCC command control for its customer, and to focus management efforts on activities related to the successful completion of this project. Similarly activity-based accounting implies that CVP would fund the project of the creation of DCC command control for the customer and the company will fund all related products and services that the company needs to complete the project successfully.

At this point, it is possible to trace the similarity of the policy of the company to the cost allocation. The company prefers focusing on specific activity to fund it and to complete it successfully. As a result, the company may benefit from the successful accomplishment of certain projects and activities. On the other hand, other activities may under-perform because of the lack of funding from the part of the company. In this regard, drawbacks of activity-based accounting and management are obvious because the company focuses on specific activities solely, while others may underperform that may lead to the degradation of underperformed activities in a long-run perspective.

On the other hand, activity-based accounting and management are cost-efficient because the company does not pour its financial resources out funding diverse projects and activities (Mehrling, 2006). Instead, focusing on the most prospective and profitable ones, the company can develop its business successfully and improve its financial performance since the company can account on positive outcomes of funding specific activities.

Standardized costing and inventory costing methods and their impact on the financial reporting and results of the company

In actuality, the company has two costing options. First, the company can use standardized costing and inventory costing. Standardized costing implies that the company grounds its costing on the basis of direct costs of materials, direct labor, and manufacturing overhead. In contrast, inventory costing method involves the evaluation of actual costs of the company, which are involved directly and indirectly. The company focuses on accounting of inventory needed for manufacturing and sale of the product. In this regard, CVP tends to use First In First Out (FIFO) inventory costing method, which the company believes to be efficient (Rubinstein, 2006). In fact, FIFO model stands on the ground that the company sells the oldest product on the ground of the costs of those products, while newer products are sold on the ground of new costs. Using FIFO model, CVP attempts to balance its costs and revenues.

However, Last In Last Out (LIFO) inventory costing method seems to be more effective, especially taking into consideration rapidly changing business environment, where CVP operates. LIFO method implies that the company sells its products at the price that covers last costs spent on products that were manufactured last. For instance, if costs of production were $100 per item a month ago, but are $120 today, the company will sell the product at the price that covers $120 costs, even though products were manufactured at the lower costs. In actuality such method is more effective because the company operates in the highly changing business environment. As a result, the company has to upgrade its products or introduce new ones to maintain its competitive position. Therefore, the company may fail to sell out all its products manufactured in the past. Hence, the company should compensate such financial losses by selling its products taking into consideration the latest costs. In such a way, the company can improve its financial performance and cover costs spent on products that have not been sold. In contrast, FIFO is less effective at the moment because some products may remain unsold and the company has to raise its price over and over again to cover costs, while customers are ready to pay more as they expect new products to appear in the market.

Product costing variances and decision making

The allocation of common costs affects consistently internal decision making. As a rule, the allocation of common costs does not occur because it misbalances the financial and marketing position of the company. Therefore, the allocation of the common costs can provoke conflicts within the organization and the process of internal decision making will deteriorate consistently. To put it more precisely, different departments may start struggling for the allocation of common costs if any of the department obtains the allocation of common costs. As a result, the decision making process grows more and more complicated because departments are not cooperating constructively but, instead, they are conflicting and opposing to each other.

In such a situation, the refusal from the allocation of common costs proves to be more effective in regard to the internal decision making because it prevents the reason for the emergence of conflicts within the organization. What is meant here is the fact that the allocation of common costs may provoke conflicts but the refusal from the allocation of common costs eliminates the primary cause of possible conflicts.

On the other hand, it is important to take into consideration the possible risk of the deterioration of the organizational performance and difficulties in decision making because some departments may need common costs to survive and the refusal from the allocation of common costs may lead to the failure of these units. The failure of some departments can affect other departments and the company will have to take decisions fast but it may unable to forecast the development of the situation even in a short-run perspective because the lack of funding may provoke the chain reaction within the company and its departments can start deteriorating their organizational performance consistently.

Product costing variation has a considerable impact on decision making, at least in CVP. The company focuses on specific projects. Therefore, CVP takes into consideration costs of specific products and services. As the company identifies prospective products, they receive the main funding, while the company excludes products that are not prospective and bring little, if any, profits. As a result, the company’s decision making is often grounded on prospects of the specific project and costs of this project.

Conclusion

Thus, today, accounting affects consistently the performance of organization. The experience of CVP shows that the use of fixed costs allocation and FIFO are not always effective. At any rate, the company should balance its costs allocations and use LIFO instead. In such a way, the company can improve its financial performance, make it more stable and predictable.