ABSTRACT

This study aim to examine “The Application of Cost Accounting Systems in Selected Businesses in Buea Municipality”. Its specific objectives are to assess to assess the traditional and contemporary cost accounting approaches used by enterprises and the usage in selected businesses in Buea. The selected businesses here are businesses in the secondary and tertiary sector in Buea using CAS and the random sampling technique was used to choose the sample businesses that will represent our target population. Primary data was collected with the use of 40 questionnaires that was answered by accountants and other department staffs of the target businesses. Frequencies and percentages were used to analyze data through SPSS and Microsoft Excel and the results were showed on tables, bar charts and pie charts.

The major findings of the study are as follows: the most widely used product costing method is process costing and the technique used is absorption costing; the most widely used overhead allocation is units produced; the most important area where the cost information is used for financial accounting, inventory valuation and to some extent for price decisions which is low on other decision making and cost control. The findings indicate that company perceives traditional cost accounting is still important and yet not familiarized with the new cost accounting practices such as activity based costing. This study recommends the creation of awareness about the importance of information for decision making practices and the advantage of using activity based costing.

All those afore mentioned CAS could be recommended to beginners who have little computer and accounting knowledge, to businesses who seek accurate, complete and simple to understand financial statements and also to businesses who seek to protect their data (recordings) from unwanted persons as these CAS have passwords to limit access to the system from unwanted persons and they also have features that protects its information from hackers and virus attacks.

Key Words: Cost Accounting, Cost Accounting Systems

CHAPTER ONE

INTRODUCTION

1.1 Background of the Study

Enterprises worldwide set of up systems and procedures for recording and reporting measurements of the costs of goods. This information acts as a tool of management for making optimum use of scarce resources and ultimately adds to the profitability of business (ARORA, 2004). 

Cost accounting, as a specialized field of accounting, is primarily concerned with the identification, measurement, recording, reporting and analysis of costs associated with production and marketing goods/services and other decisions areas. Cost accounting is broad and extends beyond calculating product costs for inventory valuation, which GAAP dictates. In fact, the focus of cost accounting is shifting from inventory valuation for financial reporting to supplying cost information for decision making (APO-ILO, 1997).

Cost accounting is an accounting system that provides financial and non-financial cost related information. Product costing is the cost of direct labor, direct materials, and manufacturing overhead that are used to create a product. And the purposes are for preparing financial statement, setting price and for control purpose (Horngren, 2003). The purpose of cost accounting is to provide key cost information to managers for their decision making. It provides information for both management accounting and financial accounting. In general, the objective of cost accounting is to act as a decision-support system for management to improve performance. In manufacturing firms, Cost accounting provides information for achieving and sustaining a competitive advantage through manufacturing excellence which requires attention to all aspects of performance (Turney, 1989).

Cost control and reduction play significant role in profit maximising business organizations that are successful in cost control and reduction, without reducing its quality can sell its products at lower amount than its competitors. Having price competitive advantage, the company can enhance its market share and become a market leader (Akeem, 2017). Cost reduction and cost control scheme become inevitable. Hence, in order not to exceed their budget and not run at loss, as well as not to reduce the quality of their products, organization needs to use effective cost reduction and control tools and techniques to reduce their cost to the lowest minimum.

The success and feasibility of the business venture will ultimately be found on this strategy of the business organization system of costing and pricing developed. That is mainly because the potential risk and profit of the company will be taken into account while the concerned company comes to engage in the process of setting the cost and price of the same Swamidass (2000). So that this stage of setting the cost and price can readily be considered as a critical stage as compared to the other process need to be undertaken besides setting this price and cost of the product.  Much academic strategy and archival research has been an influence for development of costing system.

But as time lapses the attention for investigation of this cost accounting becoming larger and larger. Costing system during the latter part of the 19^th century has been examined in some depth. Boyan and Edward (1974) explained that iron and steel company records from that period were much sophistication in costing practices, the allocation of over heads and the integration of cost and financial accounts.

In the late nineteenth century up till the early part of the twentieth century, engineering managers such as F. Taylor and Emerson devised new cost accounting procedures primarily to assess and control financial and physical efficiency of processes (Johnson & Kaplan, 1991). Because of the financial and physical efficiency mentioned, one may be tempted into concluding that it was meant to evaluate the overall profitability of the company. The whole idea was aimed at assessing the efficiency of processes.

The cost systems which existed in 1910 provided information that was relevant to a wide range of decisions concerning efficiency and product differentiation. The systems were designed by engineers working in factories to assign costs to products and product lines. After 1910, these practices faced out probably because the collection of cost information was very difficult and expensive for a widening range of products thereby making it nearly impossible to justify their benefits (Kaplan & Atkinson, 1989).

In their place, several other costing procedures came up and the twentieth century accountants adopted them to evaluate the cost of inventories for financial reports. However, while this kind of cost information was reliable for evaluating cost of inventories and financial reporting, it was irrelevant and even misleading for decision making needs, particularly for strategic product decisions. An economist, Maurice Clark, in his book “Studies in the Economics of Overhead Costs”, which he published in 1923, discussed fixed and variable costs; joint, sunk, differential and residual costs; short and long run fluctuations; and a number of other issues from the economist’s point of view. This book which most researchers and historians consider as a major contribution to cost accounting literature in the 1920s also advocated that different costs should be used for different purposes.

Lanen et al., (2011) stated cost accounting continues to experience dramatic changes. Developments in information technology (IT) have nearly eliminated manual bookkeeping. Emphasis on cost control is increasing in banks, hospitals, manufacturing industries, airlines, school districts, and many other organizations that have traditionally not focused on it. Cost accounting has become a necessity in virtually every organization, including fast-food outlets, professional organizations, and government agencies.

In any business organization, cost accounting is a center of attention as it is a vital tool in the management of the internal affairs of the organization. This cost accounting involves managers examining past performance and systematically exploring alternative ways to make better informed decisions in the future. So that the performance of the business organization will became effective and efficient in most aspects of the business venture the organization come to involve in. This means that the productivity of the company enhanced.  The cost accounting measures and reports the financial and non-financial statement information that relates to the financial and non-financial statement information that relates to the post of acquiring or a consuming resource by the concerned business organization.

Any business organization starting from the smallest sole proprietorship to the largest corporation acquiring knows how and use cost accounting concept and practice. Because this cost accounting provides the key data to manager for planning, and engage into activities that necessary to perform certain business venture, controlling the different aspects of the business organization and evaluating the decision making and fixing the product price as well as to know the price.  The research paper evaluates the process costing practice and also provides information like product cost, process cost.

  Cost accounting information system designed to provide valuable information is useful for the management of the company to assist them in the exercise of its various functions of planning, control and decision-making where management needs cost information- accurate, fast and reliable. The system of cost information is an important source in many administrative decisions, such as pricing decisions, determination of the optimal mix of products, and measurement of the cost of operations within the company, eventually evaluation of the results (Alahdal et al., 2016). Cost accountants must work with the users (or customers) of cost accounting information to provide the best possible information for managerial purposes (Lanen et al., 2011). In the preparation of the financial information the role of cost accountant is invaluable in guiding and recommending the alternative courses of action.

According to (Wilson & Chua, 2003), cost accounting is practiced by the mechanized multi process, cotton textile factories that appeared in England and United States around 1800. This point of view was consistent with (Garner, 2004) who pointed out that cost accounting had emerged only after eighteenth century as a result of the rise of the factory system in the industrial revolution.  The traditional view contained that cost accounting arose due to the increase use of fixed capital prompted accountants during the industrial revolution to graft cost accounting on the double entry system (Johnson, 2001).

The evolution of cost accounting is a single in to three eras-the first era from the first appearance until before the industrialization; the second from the industrialization to the twentieth century and there after the third (Antonelli & Vetal, 2009). During the first era, the nomenclature cost accounting might not exist as a clear and well recognized concept like it is today, the activity could be called by other names. The first point appearance of cost accounting can be traced back to the fourteenth century (Thukaram, 2012). With the expansion of the scale of business, mainly in manufacturing activities that small enterprises started to produce trade items such as books, woolens, coins and wine, an expansion in cost accounting was required (Cunagin & Stancil , 2002). 

Modern business firms utilize a variety of cost accounting practices in an effort to manage expenditures and maximize profits (King et al., 2009). All business enterprises try to maximize profit margin by controlling expenditures. A cost accounting department can minimize the costs by providing all necessary information to management.

A manufacturing company’s income statement is more complex than a retailer or a merchandiser as it transforms raw materials into finished goods through the use of labor. As a result of manufacturing goods, manufacturers must understand the various costs associated with this production process. It is simply not sufficient to know the price paid for raw materials when manufacturing a finished product. The cost accounting system used by a manufacturing company should be able to provide information relevant for the external reporting system.

For a manufacturing firm, financial reporting separates costs based on when those costs becomes recognized as expenses. All costs manufacturers can be classified as product or period costs. Product costs are frequently referred to as manufacturing costs. These costs are assigned specifically to units of production and recognized as an expense when product is sold. As such, product costs follow the product through inventory and are recorded as an asset in the inventory system. Period costs include all other manufacturing costs. These costs are expensed as they are incurred (Lanen et al., 2008).

It is therefore important for businesses to adopt and utilize cost accounting methods that fully recognize cost and allow for innovation within the company (Kawan, 2011). In developing an effective cost accounting system; executives can apply several techniques that will undoubtedly assists in the operations of the organization. Executives should understand the importance of these methods in producing one efficient cost accounting system that will help cut costs and produce quality out puts. Techniques that management can utilize to develop a better cost accounting system to compete in the global market include standard costing, historical (or Conventional) costing,  target costing, Marginal Costing, Absorption Costing, material resource planning (MRP), enterprise resource planning (ERP), total quality management (TQM), activity based management (ABM), activity based costing (ABC) and the just in time approach ( Hansen, 2009).

Cost accounting especially for enterprises is the key factor for achieving the desired profit since cost of raw materials is the major expense. Even though method of costing differs from industry to industry and it depends on the nature and type of the business, it is advisable to design effective costing systems to manage and control costs of the organization efficiently.  Therefore, in this research the cost accounting systems/practices in selected business is examined.

1.2 Statement of the Problem