Structure of Cost Accounting Systems and the Information Qualities for Decision Making

Tally Solutions |Updated on: December 29, 2021

• What is Cost Accounting?
• Structure of Cost Accounting Systems
• Understanding each characteristic of Cost Accounting Systems in Brief and it’s Relevance in Decision Making
  • Level of Detail of Cost Information
  • Ability to Disaggregate Costs According to Behaviour
  • Variance Calculation
  • Frequency of Information
• How do Cost Accounting System Help Businesses?
• Conclusion

What is Cost Accounting?

Cost accounting is the process of recording, classifying, analyzing, summarizing, and distribute costs related with a process, and then developing various courses of action to control the costs.

The aim is to advise the management on how to optimize business practices and processes based on cost efficiency and capability. It provides detailed cost information that management needs to control current operations and plan for the future

Structure of Cost Accounting Systems

Cost accounting systems structure is usually defined by four distinct characteristics. The following are the characteristics of Cost accounting systems

• The level of detail of cost information,
• The ability to disaggregate costs according to behaviour,
• The extent to which variances are calculated and
• The frequency at which cost information is provided to users

Understanding each characteristic of Cost Accounting Systems in Brief and it’s Relevance in Decision Making

Level of detail of Cost Information

The first characteristic of cost accounting structure “level of detail” refers to the extent to which information is presented in various forms based on the criterion of analysis selected such as the customer level or the cost centre level.

So it lies that the detailed information saves managers’ valuable time that would otherwise be spent on formatting cost data each time they had to make a decision.

Finally, we can say that the higher the level of detail the greater the degree to which costs are analyzed for different purposes and the more appropriate and useful the information for decision making.

Ability to disaggregate costs according to behaviour

This attribute of cost information systems relate to the extent to which a management accounting system can classify costs according to a fixed/variable, direct/indirect and controllable/non controllable categorization.

Any cost accounting system which allows better understanding of cost structure, provides information at an appropriate level of analysis for decision making purposes, satisfying users’ information queries and, it is, therefore, more intensively useable when decisions are made.

Variance Calculation

The third attribute of Cost accounting structure “Variance Calculation” indicates the extent to which a management accounting system allows the analysis of the differences that emerge between budgeted and actual results.

Analysis of variances allows a close monitoring of the degree to which budgeted cost and revenue targets are realized. The preview of budgeted to actual results forces managers to evaluate whether their estimations are close to reality, analyze the reasons that explain the deviations from budgets and modify estimations whenever needed.

And henceforth, it is expected that information derived from a cost accounting system that calculates variances to a significant extent, better meets users’ needs and it is, thus, more extensively used for decision making purposes.

Frequency of Information

This attribute of cost accounting structure called “frequency of information for informed decision making“ relates to the degree to which information is provided on demand as well as the frequency of reporting systematically collected information.

So it’s there by expected that when the information that is available to users is frequent and it is provided in a timely manner, it reflects a more upto date and reliable estimation of costs. Besides it also safeguards that the cost accounting system provides faster feedback on recently made decisions.

How do Cost Accounting System Help Businesses?

When we employ different attributes of cost information systems that serve as measurements of the effectiveness of Cost accounting systems, we see it’s indicative relevance in providing high quality information of the extent to which it feeds the information that managers need in order to make decisions in relation to institution of latest or new products or services, pricing, redesign of processes etc,.

With regard to the point of usefulness is concerned, it measures the degree to which managers rely on cost information in order to make decisions.

When more specifically measured, it reveals that the use of cost accounting system provides a tool for monitoring the firm's organizational activities, such as the evaluation of managers' efficiency, identification of non value adding activities, the valuation of inventories, the analysis of customers' profitability, the design of production and sales strategy and so on.

Any piece of information provided by cost accounting systems is of analytical nature which is perceived as useful by managers of departments who have interdependent operations.

A good product cost system should report expenses incurred not only at each responsibility center, but also across the organization's entire value chain and this is the point where the decision of implementing cost accounting systems becomes the desire of every successful business.

Conclusion

There is always a positive association among cost systems structure attributes and cost information quality properties in terms of detailed information existence, variance calculation and frequency in reports preparation which exerts an influential role on the relevance, accuracy, timeliness, usability, compatibility, up to datedness, reliability, and thoroughness of information for decision making purposes. And this makes the installation of cost accounting systems for any business a compulsory task to stay competitive in the market.