CURRENT TRENDS OF PRODUCTION COST ACCOUNTING
MICULESCU, M[arius] N[icolae]; LUT, D[ina] M[aria] & MICULESCU, C[orina]
Abstract: The present economic context, in which firms
operate, has significantly changed, the current environment
being characterized by globalization, increasing competition,
rapid changes, market segmentation, changes in technology,
demand instability, importance of information. The economic
environment influences organization in various forms, affecting
strategy, structure, system control and performance.
Consequently, these changes have determined deep mutations
in the core of the Third Millennium society and they have also
revolutionized both the means of production and a reshaping of
management accounting and cost calculation. The latter
represents the most important source of information in the
decision taking process. In this context, it is highly relevant to
analyse the present trend of adopting modern costing systems
to the detriment of the traditional ones and to the adaptability
of this reform in general practice.
Key words: cost, information system, management accounting,
JIT method, ABC method
1. INTRODUCTION
Continuous market globalization and rapid technological
changes in production have created worldwide fierce
competition. In order to achieve various competitive
advantages, the operational entities of a society must adopt
strategies that integrate environmental opportunities, market
and technology assets in the most efficient way. In this context,
several issues, such as the modernization and transformation of
management accounting, an adaptation to the reality and
presents demands, to the modification of tools, processes and
working methods in order to meet the present scientific and
technical progress.
This situation raises the following question: have traditional
costing systems become inefficient, remaining only a
theoretical history in the evolution of management accounting
and leaving the place to modern costing systems designed to
meet current requirements adequately?
Many would unequivocally support the current trend but it
is always recommendable to be aware that theory is the ideal
and pure state of things while practice mirrors the real situation.
Thus, we should have good knowledge of the past in order to
approach the future with certainty
2. MANAGEMENT ACCOUNTING
EVOLUTIONARY TRENDS
The American Institute of Certified Public Accountants
(AICPA) states that management accounting manifests itself in
practice in three areas:
• Strategic management - indicating the role of management
accounting as a strategic tool of the organization;
• Performance management - developing the practice of
business decision taking and managing the performance of
the organization;
• Risk management - helping the development of the
framework and practices for the identification,
measurement, management and report of the risks that
appear while achieving the company’s objectives.
The accounting professionals’ complementary studies and
concerns supported by those from other related fields, such as
marketing, management, etc., generated a revolution in the
methodology of costing systems.
Management accounting should provide relevant
information for decision taking or for the evaluation of stock
items by the means of costs-related information. This may not
be fully accomplished using traditional costing systems because
the charging of indirect costs of calculation objects is made in a
both rational and random manner.
Professor R.S. Kaplan says that traditional management
accounting produces "wrong measures. It orientates the
company in the wrong direction, rewards managers
endangering the business and does not provide any
improvement solution. The best thing we can do is to disable it,
even to stop it! "(Lucey, 1992: 420)
In response to the technological changes, theorists and
practitioners have started to develop new methods of costs
calculation, such as:
• Just-in-Time method, which is both a method of
manufacturing and cost accounting;
• Cost method based on activities (Activity Based Costing,
ABC), which seeks, on one hand, to make a more accurate
distribution of indirect costs in production costs, and on the
other hand, it aims to establish a relationship between
indirect costs and the activities they induce ;
• Costs - target method (target costing) aims to find a
maximum allowable cost per product starting from a
previous market prospecting before the designing of the
product.
• Backflush Accounting method (BFA) uses a reverse
approach of the production flow beginning with the value
of sold goods compared to which costs will be distributed
upon sold products and stock.
Accordingly to the JIT (Just-in-time) method, production is
"pulled" downstream by customer orders, and it is not "pushed"
upstream as in the case of scheduling based partially on sales
forecasts which are adjusted by the stock of final products. At
this stage, the inherent risk (presented generally by the
traditional methods) of the excessive growth of stocks with
serious financial consequences disappears, especially if the
final products and components are not standardized. The JIT
system, excellently suited for repetitive manufacturing,
organizes manufacturing not after a schedule but according to
the orders received from customers, which allows:
• the improving of trade effectiveness;
• stocks reducing (target: Stock zero), job, materials and raw
materials losses and, consequently, reduction of production
and storage costs, creating an increase in profit margins;
• reduction of the working capital need, thus the increasing
of the capital return.
JIT enables the increasing of system responsiveness to the
demanded commercial production. Thus, the company seeks to
improve the production system response by allowing a much
faster response to changes of the quantitative and qualitative
demand. System stagnation must be diminished by redesigning
the production cycles in order to obtain a better responsiveness.
The traditional organizational forms often have periods of weeks
or even months. In other words, this means that the system does
not respond to a change of the demand until after this period. The
reducing of the cycles is expressed by a reduction of the stocks at
all levels, stocks of raw materials being included, which means
that suppliers deliver on a rhythmic basis. There will be a
reduction in stocks of production in progress and a reduction in
the time of passage through all the workshops. These changes
will ultimately lead to reduced stocks of final products, meaning
increased production mobility.
“Stocks reduction is a subordinate goal of the reducing
cycles. There is a linear relationship between cycles and
average inventory levels. The determination of the variation of
a factor is actually reduced to the finding of another factor’s
variation, in the same direction and in the same proportion.
However, it is often easier to express objectives in terms of
reducing stocks because they are more visible and more easily
controllable than periods of time. If you want to reduce stocks,
you must eliminate the factors (elements) that led to their
increase, such as quality flaws, equipment failures, setting
times, etc. The improvement of the performance at each of
these levels does not represent a sole objective but rather a
necessary condition to reduce both inventories and cycles. “
Activity Based Costing highlights the causal link between
resources, activities and the calculation subject according to the
principle "activities consume resources and products consume
activities." This approach involves the abandoning of vertical
steering of the enterprise, with riding crop down on functions and
adopting a transversal approach, considering the value chain, a
concept developed by Michael Porter. Cost activities (process) do
not only meet the last objective pursued in the classification of
costs but they can equally serve stock assessment, and decision
making. The ABC system is a complex one, "promising” a
“cleaner” and a more “useful” cost for managers. Thus, the
question “Is ABC the solution?” springs up.
Activity based costing helps managers calculate a
completely relevant cost. The implementing of such a system is
very expensive though and it should be taken into consideration
that the information provided must be really used for decision
making and profitability improvement. Otherwise, the ABC
method will involve high costs for its implementation.
The basic concept of the ABC method is that products do
not consume resources but activities, and activities consume
resources - hence the object of calculation must be the work
and not the product.
Although it is a complete system that calculates a cost, it
differs from the traditional methods. The most important
differences are following:
• both production costs and general and administration costs
can make up the cost of product distribution, following a
logic of cause-effect type;
• some production costs may be excluded from the cost of the
product;
• more work units are used for the distribution of indirect costs.
The ABC method is motivated by the belief that traditional
accounting information is useful to managers who are interested
in assessing the effectiveness of resource allocation decisions in
their businesses. This traditional information is involved in
meeting the needs of the external auditors or other persons who
are interested in financial and accounting records.
In traditional systems, when establishing the product’s cost,
only the production costs are taken into consideration, while
distribution costs and general administration costs are
associated with the period cost and are not allocated to
products. However, some of these costs, that apparently are
unrelated to the products, can be easily identified on products
Even more, within traditional systems, all production costs
(direct and indirect) are allocated to products. But