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Fundamentals of Cost Accounting 2nd Edition by William Lanen, Carolyn Wells, Michael Maher
Edition 2ISBN: 978-0077274993Fundamentals of Cost Accounting 2nd Edition by William Lanen, Carolyn Wells, Michael Maher
Edition 2ISBN: 978-0077274993 Exercise 1
How can cost accounting information together with a classification of activities into those that are value-added and those that are nonvalue-added help managers improve an organization's performance
Explanation
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Accounting systems
Purpose of creating accounting information system is to provide information for decision making of accounting users. Users can be classified as primary users like investors, government, creditors etc. and secondary users like internal including managers or employees. Accounting systems are also classified as financial and costing accounting system also differentiate between the users like primary and secondary ones.
Cost accounting
This system is designed for inhouse or internal managers and their decision making. Cost accounting information is not needed for comparison with other companies. This information is commonly used in financial accounting also, but it is primarily used by company managers for their decision making. It is important that cost accounting information is relevant for the decision making of the manager.
Classification of activities as value added and non-value added to improve organization's performance
Value added activities enhances the value of goods or services like production, packing, polishing etc. Nonvalue added activities do not add value to products or services like quality check, order processing, handling customer complaints, equipment design etc.
All nonvalue added activities can not be removed or eliminated but these can be minimized. Managers of a company use the classification of value added and nonvalue added activities to: -
•Turnaround time to produce goods or deliver services is reduced as many steps in the production process are eliminated.
•Reduce cost as many steps and activities are minimized by automation or re-engineering the production process. Dependency on human efforts and requirement of manpower is reduced by automating the ordering process.
•Reduces error rate and improves quality by identifying nonvalue added activities like correction of errors by making the process first time correct.
•It is easy for the managers to focus on the value-added activities to improve the production and use the resources in more productive manner.
•Saves times of key managerial team as nonvalue added activities are out of focus and eliminated or reduced also etc.
Purpose of creating accounting information system is to provide information for decision making of accounting users. Users can be classified as primary users like investors, government, creditors etc. and secondary users like internal including managers or employees. Accounting systems are also classified as financial and costing accounting system also differentiate between the users like primary and secondary ones.
Cost accounting
This system is designed for inhouse or internal managers and their decision making. Cost accounting information is not needed for comparison with other companies. This information is commonly used in financial accounting also, but it is primarily used by company managers for their decision making. It is important that cost accounting information is relevant for the decision making of the manager.
Classification of activities as value added and non-value added to improve organization's performance
Value added activities enhances the value of goods or services like production, packing, polishing etc. Nonvalue added activities do not add value to products or services like quality check, order processing, handling customer complaints, equipment design etc.
All nonvalue added activities can not be removed or eliminated but these can be minimized. Managers of a company use the classification of value added and nonvalue added activities to: -
•Turnaround time to produce goods or deliver services is reduced as many steps in the production process are eliminated.
•Reduce cost as many steps and activities are minimized by automation or re-engineering the production process. Dependency on human efforts and requirement of manpower is reduced by automating the ordering process.
•Reduces error rate and improves quality by identifying nonvalue added activities like correction of errors by making the process first time correct.
•It is easy for the managers to focus on the value-added activities to improve the production and use the resources in more productive manner.
•Saves times of key managerial team as nonvalue added activities are out of focus and eliminated or reduced also etc.
Fundamentals of Cost Accounting 2nd Edition by William Lanen, Carolyn Wells, Michael Maher
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