Importance of Cost Accounting System in an Organization

Running Head: ACCOUNTING FINANCIAL ANALYSIS REPORT
ACCOUNTING FINANCIAL ANALYSIS REPORT
Name of the Student
Name of the University
Author Note

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Introduction
Increase of the needs of the organisational change the managerial accounting system
has been continuously developed in the last few years. But, there are certain factors that
exists in an organisational culture that will effect on the implementation of such techniques in
the business. The main objective of this study is to unique aspect of Activity-based costing
system that can help the strategy of organisational change. There is a need of ABC system to
provide quality information and can help the organisation in solving cost related issues. It
also helps in competitive business environment by accurately determining the product cost &
helps in better decision-making. The assignment will focus on understanding the management
accounting system and the different techniques used by most of the business. The paper will
discuss on the importance of cost accounting system in an organisation. It will focus on the
implementation of activity-based costing system in a business process. The paper will discuss
on three articles of implementation of accounting-based costing system in the manufacturing
sectors. This paper will provide a findings from the three articles related to the process of
activity-based costing technique. The main objective of this essay is to find the reason behind
not using certain accounting system like activity-based accounting system in an organisation.
Analysis
Management Accounting
Managerial accounting is the accounting process related to preparation of reports of
business functions & operations that can help the managers to make their business related
decision. This is an important process that helps in both the short-term & long-term decisions
of an organisation in order to accomplish the organisational objectives (Otley 2016). This
helps in making important decisions like budgeting, pricing of product and decisions on
enterprise profitability. Management accounting contains all the information that may help

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the manager to make decisions on meeting the demands of the customers and also maintain
the competitive positions in the global market. It also helps the operations managers to have a
complete update on production of goods & services. Income statement contains all the
revenues & expenditures of a company which gives a detailed information on price setting
and helps in achieving the future profits (Cooper, Ezzamel and Qu 2017).
Techniques of Management Accounting
1. Financial accounting information- In this technique, analysis of company’s financial
statements is done through ratio analysis, comparative analysis, cash flow & fund
flow analysis, return on capital employed techniques (Shil and Das 2018).
2. Cost accounting information- Analysis is done using cost information through various
costing method like standard costing system, marginal costing, direct & incremental
costing, differential costing and cost variance analysis.
3. Future information- Analysis is done using budgeting techniques, budgetary control
by analysing the revenue variance, business forecasting and project appraisal method.
4. Use of miscellaneous tools- This include integrated auditing, financial planning,
revaluation techniques, management information system and other managerial
reporting process (Armitage, Webb and Glynn 2016).
Costing Accounting
Costing accounting system is a techniques used in management accounting system to
understand the total cost of production process. This type of accounting is used to make
business related decisions (Wegmann 2018). It contains all types of fixed costs and variable
costs. Costing accounting system can be activity-based costing, marginal costing and
standard costing system. This is generally used by the internal management to identify their
fixed & variable costs that is associated with the production process. These type of costs are

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recorded individually and then the costs are compared with the output in order to manage the
financial performance (Cardes and Gooneratne 2016). Fixed costs of the production process
doesnot vary and it depends on the level of production. An increase or decrease of production
level will have no effect on the fixed costs. Variable costs changes according to the change in
the production level. Other type of cost are operating cost that is related to day-to-day
business operations (Santos 2018). This can be fixed or variable according to the business
situation. Direct costs are the cost that is directly related to the production of a product and
the indirect costs are the cost that is not directly relate to the product.
Comparison of costing techniques in different sectors
Types of Cost
Accounting
Definition Industries
1. Standard cost
accounting
This costing system is used to
compare the standard price
with the actual results in order
to find the variance of change
and take corrective control
measures according to the
variance (D'Onza, Greco and
Allegrini 2016).
This is widely used in the
manufacturing industries.
2. Activity-Based
accounting
This type of costing method is
sued to assign cost to each
and every activities that s
involved in the production of
goods & services according to
the actual consumption of
This is widely used in the
manufacturing industry to better
classify the costs in the
production process. It is also
used in construction sector,
health care sectors and

4ACCOUNTING FINANCIAL ANALYSIS REPORT
each activity (Tsiplova et al.
2019).
agribusiness sector.
3. Lean accounting This type of costing system
collects the processes &
principles that could help to
provide certain numerical
feedbacks that can help the
management to make further
adjustments in making
changes in the operations.
This is also used in
manufacturing process and
transporting sectors.
4. Marginal costing In this type of costing system,
the variable costs is charged
to the cost units, whereas the
fixed cost is written off
against the contribution.
It is also widely used in
manufacturing sectors.
ABC System Traditional costing System
 This system identifies the specific
overhead operations of the
manufacturing process.
 It is more accurate.
 It is suitable for large number of
products
 This system identifies the average of
overhead rates on the basis of labor
hours.
 It is complex and inaccurate
 It is suitable for few different
products.
Managing the change in change of techniques

5ACCOUNTING FINANCIAL ANALYSIS REPORT
Management accounting system includes all the changes in the individual process that
has to be managed in an organisation. The components of change framework helps in
applying the change techniques in the business process. Certain factors like organisational
culture and user resistance generally vary according to the level of the change and this
impacts the implementation of techniques of management accounting (Brynolf et al. 2018).
Activity based costing system of managerial accounting can be discussed in this
study. This type of accounting system is widely used by most of the manufacturing sectors.
Activity-Based Costing
Activity-based costing system is an accounting system that is used to identify the total
cost require to manufacture a product. In this technique, cost is assigned to each activity of
the production process. This type of costing technique is used to identify both the direct cost
and indirect cost that is required to create a product. It assigns the overhead expenses & direct
expenses to the product. This technique first identifies the activities that is required to create a
product. Then it separates these activities with a group of individual costs. It determines the
overhead cost in each activity (Shea et al. 2018). Then it divides the total overhead costs with
the total cost drivers to get the cost driver rate. Then the cost driver rate is computed with
respect to the hours, units or parts and then it is multiplied with the cost driver rate.
Activity-based costing system is widely used for making overhead decisions and
pricing the products. Overhead decisions include the decisions on whether certain activity is
required in the production process or not. ABC accounting system assigns cost to each
activity and helps in accurately setting the price of the product.
Articles
A survey on Irish Firms

6ACCOUNTING FINANCIAL ANALYSIS REPORT
According to the author Martin, Otman and Mark, a firm must use a stable costing
methods on their business. Some of the organisation doesnot use activity-based costing
system due to rapid change of information technology. It has been discussed that, the
implementation of activity-based accounting is unsuccessful due to the software &
architectural design of the organisation. They have done study on the costing accounting
system of small & medium Irish firms. They reviewed that most of the firm’s doesnot want to
change their current costing system of activity-based cost accounting. Nearby 1000 of Irish
companies rejected this technique of accounting. A survey was conducted on focusing why
most of the organisations are not focused on using the modern techniques and why the
primary methods are not changed in the business system. It was noticed that, the modern
techniques are time consuming, require a high level of cost of change and it was also noticed
that the management doesnot want to change in their business process. There were certain
organisational issues found in adopting these modern techniques. This includes technology,
organisational size, the different type of products or services offered, competition in the
market. It was also identified that most of the organisation has rejected this costing system
due to complexity in the process. But, it was noticed that, technical issues was not a reason
for the rejection of ABC techniques. Therefore, the barriers found during the survey should
be changed in order to adopt this technique in the managerial accounting system.
A case study on Qaemshahr Municipality
In this case study, the activity-based costing system has been understood in the public
organisations. The study was done on Qaemshahr Municipality. It was discussed that ABC
accounting system has many benefits which includes; performance measurements, helping
the budgets, helps in decision-making and reducing the cost. This type of accounting system
helps in identifying the changes occurred in the system, the complexity in the process,
diversity & each and every activities of the process. But it was found that the technical,

7ACCOUNTING FINANCIAL ANALYSIS REPORT
environmental and personal factors have highly affected the implementation of ABC
accounting in Qaemshahr municipality. Topsis technique was implemented in the ABC
costing system and it was found that presence of few cost centres, few cost issues, strong
connections of value & costs, effective organisational plan has a successful implementation
of the system. It was found that, the perspective of managers is very important in successful
implementation of ABC costing system. Managers should focus on identifying the factors
that will help the community, they should establish a strong guidelines in their costing system
and train their cost centres for effective cost control. It is the duty financial & accounting
department to properly implement the techniques. Individual factors like lack of detailed
study while designing the system, not having enough venture by the designing team and
inappropriate behaviour of authority will affect the successful implementation of ABC
techniques. Certain organisational factors like participation of non-financial departments in
the cost designing and implementation process, lack of resistance to the new information will
affect the successful implementation of the costing system. These factors will have a highest
impact in the implementation of ABC system.
Analysis on Irish firms- Qaemshahr municipality find the organizational factors like
adequate training, presence of supervisors and monitoring the operations and other factors are
more very much important for successful implementation of ABC system. Research was
conducted on 1000 Irish firms. Whereas, in Irish firms the senior management donot support
to these changes and reject to implement this method.
Behavioral and organizational variables affecting the success of ABC in China
According to the authors (Zhang and Che Ruhana 2010), in an advanced
manufacturing environment, accurate costing information is very much important. Activity-
Based costing system has the abilities to provide an accurate information related to costing

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that helps in making decisions. Chinese firms have significantly adopted this costing system
in its manufacturing activity. The support from top management and implementation of ABC
gives a positive result. Top management plays an important role in implementing ABC
technique in establishing firm’s competitive strategy. The critical knowledge on competitive
environment helps in successful implementation of ABC system. Chinese manufacturing
firms gave importance to technical characteristics. Information on ABC system are more
accurate, reliable and understandable. Therefore, a significant relation were found between
top management support and ABC success.
Analysis on Irish Firms- This study supported that implementation of ABC costing
system, but the survey on Irish firm have rejected the use of ABC system. The firms are more
satisfied with traditional methods. They found it time consuming, requires a high level of cost
of change and it was also noticed that the management doesnot want to change in their
business process.
Analysis on Chinese Firms
According to the author Tiantian Tang, the traditional costing method is not effective
for cost control in the agricultural projects. The overall analysis & calculation cannot be
effectively done using this system. ABC system help in determining the cost drivers. It helps
in providing accurate information, analyse the activity chain & value chain of the agricultural
water conservation projects. Analysis was done on management departments &
constructional personnel of agricultural projects. It optimize an enterprise value chain and
save costs of the business. China consider this system more useful in terms of controlling the
costs of the projects.
Analysis on Irish Firms- China find activity-based costing system is more accurate
and helps in controlling the costs of agricultural projects. Whereas, Irish firms donot find

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ABC system as cost effective. They find this technique is more costly than traditional method
and is more complex to implement.
Findings from the article
First findings from the article is that, Activity-Based Cost accounting is an effective
method that helps in providing accurate information if the top management support on
providing efficient information. The staffs & employees have sufficient knowledge on the
new accounting system.
Second findings from the article is that, Activity-Based Costing system is very much
important in getting accurate information for cost control. It is very much important for the
management to make strategic decisions on controlling the costs. The most important concept
is that it is not always important to improve the technical skills to adopt the ABC technique, it
is more important to embed this system in the organisational change.
Activity-Based Information System
Activities and the business process are the important basis for successful business
integration. Before implementing an organisational changes, the management must
understand the impact of decisions on the business process (Kren 2018). They must focus on
time-based management, balance score card, budget justification, profit management and cost
management decisions on their business system. All the above activities are the basis of
activity-based measurement (El Mawas et al. 2018). This is an important tool that supports
during the organisational change. It helps in delivering value by providing accurate
information to the management. This technique provides a justification on restructuring the
organisational activities and eliminating the organisational inefficiencies. It also helps in
managerial decisions in the field of cost reduction and improving the decisions.. Therefore,

10ACCOUNTING FINANCIAL ANALYSIS REPORT
activity based information is very much important in successfully implementing the change in
the organisation (Cannaert et al. 2017).
Therefore, certain accounting system like accounting based accounting system should
be widely used by embedding the factors of organisation in the organisational change
process.
Conclusion
Therefore, it can be concluded that, while implementing the organisational change the
management must focus on several factors in the business. They must identify the most
widely used accounting technique that has been adopted by most of the organisation. It has
been identified that, the implementation of ABC system in an organisational change is
sometimes critical for organisations. This is not due to technical issues but due to
unsuccessful implementation of architectural & software design. But, the highest impact of
certain technical factors, organisational factors, environmental factors and individual factors
will affect the successful implementation of ABC system in a business process. From the
study of articles, it has been evaluated that uncertainties in the environment and the several
market orientation like customers need, competition and other factors are helpful in
successfully implementing this costing system. This is widely used by most of the
manufacturing industries. The ABC costing will provide certain information in activity-level
of manufacturing process that can help the managers in making successful financial & non-
financial decisions of the organisational performance.

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Appendix- Word count
Indicative mark
Introduction 200 6%
Analysis 2500 74%
Conclusion 300 10%
Spelling, grammar and punctuation 5%
Referencing: 5%
Total 100%