Manager’s Behavior in Choice of Costing System †Free Samples

Question: Discuss about the Managers Behavior in Choice of Costing System. Answer: Introduction The business and commercial organizational structures have undergone huge dynamics, changes, modifications and transformation in an international framework. With the increasing complexities and variability in the construct of the businesses and the commercial operations, the commercial activities have also undergone substantial changes and newer methods, activities have emerged in the scenario, and many of them have gained significant importance, to the extent of becoming indispensible in the current day business operations. Accounting, especiallycost accounting system or costing system, as a necessary business activity has gained immense importance among the businesses all over the world with time (Bumey, Henle Widener, 2009). The costing system of a commercial enterprise, refers to the framework or the mechanism which used by the management of the concerned organization, in order to measure the cost of production and other business activities that are undertaken by the concerned organization. This system, therefore, also takes into account the profitability of the firm in the short run as well as in the long run, the management of stocks and inventories as well as the analysis of cost controlling and designing of cost effective ways of production (Kokubu, 2013). As an accounting process, the costing system involves collection of information regarding the cost of operating a business including the cost of production, analyzing and classifying these costs and analyzing the costs and ways to make the process more cost effective. A robust costing system has the primary objective to make the commercial activities more efficient and to increase the prospects of the commercial enterprise. Therefore, cost accounting, as a professional practice, is one of the mechanisms to be undertaken with great importance on part of the managers. There are different types of cost accounting or costing systems, which vary according to the mechanisms, the nature of the participants, the types of business and the business structures. Among the different costing systems, which is chosen for a particular commercial enterprise depends primarily on the manager of the concerned enterprise and the behavior and working mechanism of the manager and his or her perception regarding the business activities and the market in which the organization is operating. The assignment takes into this aspect of the behavioral patterns of the managers regarding the costing systems they undertake in the business operations, the factors influencing their decisions and the problems encountered in this process (Lau Moser, 2008). Evolution of the costing system: As discussed above, the costing system of the commercial enterprises has evolved over the years, adapting to the new dynamics, complexities and changes in the way of doing business across the world. Initially at the time of its emergence, the costing system refered to the simple accounting of the costs, incurred in the productive activities of the firms. However, as the nature of business went on changing the costing system also evolved and various new methods came into existence, which were designed according to the needs felt in the commercial enterprise. Costing systems such as process costing, job costing, absorption costing and others started to come into existence (Fleischman Parker, 2017). Traditional Costing System versus Activity Based Costing: The different forms of costing can be broadly simplified and divided into two types of costing system, the traditional and the activity based costing system. Traditional Costing System- in this form of costing mechanism, the costs are simply assigned to the goods and services produced, on the basis of an average rate of overhead cost. This method of costing system is extremely simplified and it equally allocates all the indirect cost of production using one driver of cost, which is generally the machines hours. However, this over-simplification though makes this costing system easy to use, but raises a question on the accuracy of such costing system (Sarokolaei et al., 2012). Activity Based Costing System- In this costing framework, costs are assigned individually to all the activities that are being performed in a particular enterprise and based on these assigned costs to each activity, the cost of production is then determined. The nature of this type of costing system, though being a bit complicated and time taking than the previous one, the activity basedcost accounting is more accurate than its traditional counterpart (Elhamma Zhang, 2013). Research Question: In the above context, the primary question of concern, which will be dealt with in this assignment, is the role of the manager and the behavior and the perception of the manager in the choice of an appropriate costing system for the commercial enterprise he is associated with. The underlying notion is to analyze the efficiency of the costing systems in the light of the theoretical as well as the empirical framework and to find out the limitations and the scope of improvements in those areas. An extensive narrative literature review regarding the aspects discussed above is included in the following section of the assignment. Literature Review: Costing system, as an essential management activity in any commercial enterprise, has been in practice for quite some decades, like any other business activity, has evolved a lot in its course, and has changed a lot with the incorporation of more and more complexities and dynamism in the business framework in the global scenario as a whole. There has been a lot of research and scholarly works on this aspect. In the scholarly work of Drury, (2013), talks extensively about cost accounting as a method of immense importance which helps in augmenting the productivity and the overall performances of the commercial enterprises. The author asserts about the importance of costing system as a process to be incorporated by the management of the commercial enterprise. The paper, takes into account the path of evolution of the costing system in the history of dynamics of commercial enterprises. However, the domain of venture of this paper is limited, as it does not focus extensively on the types and the changes in the costing system and the adaptability of different types of costing systems in different businesses according to the need and the structures of such systems. In this context, a more comprehensive and detailed explanation of costing system of cost accounting system and their types have been put forward by Ku?dowicz Ku?dowicz, (2012), in their research paper. The paper primarily talks about the variations in the different types of costing process, which arises mainly due to the differences in the time horizons and the scope of accounting. The different needs of the various participants and stakeholders in one business activity, there may be more than one type of costing systems present in the same enterprise, which may lead to the creation of divergence in the result, and misinterpretation of the costs accounted. This in its turn may have adverse effects on the decision making regarding the business activities of the firms. Thus, this paper, mainly focuses on the problems of using different costing systems simultaneously. Issues in costing system: As is primarily asserted by Ku?dowicz Ku?dowicz, (2012), there are several issues of concern regarding the choice and the operating mechanism of the costing system of any commercial enterprise. A lot of the prospects and the proficiency of the commercial enterprise, depends on the efficiency in the decision making process of the stakeholders of the same, regarding the financial and the non-financial aspects and how the enterprise should operate. In this regard, Rankin et al., (2012), in their extensive works, suggest that the decision making of the managers and the other stakeholders of an enterprise, is in turn highly influenced by the information (both financial as well as non-financial) available to them, regarding the performance and the operations of the concerned commercial enterprise. The paper, thus asserts that to provide inclusive, appropriate and timely information to the stakeholders, it is necessary to choose a proper costing system as it plays a significant role in the financial accounting of the enterprise. Therefore, the main hurdle in this context, as suggested by the authors is the proper choice of a costing system, usually by the manager of an enterprise, which is expected to fulfill the requirements of all the stakeholders. Positive and Normative Accounting Theory: In constructing any business operation system, it is of utmost importance to have a robust theoretical background. Accounting too, like any other professional operational framework, have theoretical frameworks, based on which the operations are constructed, including the costing mechanisms, which is the issue of concern in this assignment. Gaffikin, (2007), in this context, shows the massive change that has been experienced in the accounting approach pre and posts the 1970s. As the author suggests, post 1970, the mainstream accounting has shifted from the normative form to the positive form. In simpler words, earlier accounting practices were mainly based on the normative aspects, which mainly dealt with the question of what should be. However, with time and with the increase in the importance of the empirical data and the insights provided by them, it was realized that making the business and accounting operations on the basis of these existing data evidenced will be more beneficial than simply relying on a rigid normative framework (Bonin, 2013). These arguments are also supported by the paper of Deegan, (2014), who discusses the characteristics of the positive accounting theory and its prospects in details, keeping into consideration, the implications of such theory on the managers choice of the cost accounting theories. As the author argues, unlike the normative approach, the positive accounting theory, is a rational ad reality-based approach which takes into account the empirical data evidences regarding a particular aspect and based on the same designs the methods of operation and the decisions relevant in that aspect. The aim of such theoretical construct is to examine, describe, explain a situation and then based on that embark in controlling the situation. This indirectly indicates towards the importance of the managers perception of the business situations, in decision making, which also includes the decision regarding which costing system will be appropriate for the efficient working of the commercial enterprise (Set yorini Ishak, 2012). Managers choice of costing system: As has been seen from the above discussed scholarly works, it is evident that the choice of costing system in an enterprise, primarily depends on the manager of the concerned enterprise, his behavior and perception towards the business activities, the market in which his enterprise is operating and the requirements of information for himself and the stakeholders. Shields Young, (1989) takes into account this behavioral aspect of the manager in his or her choice of the cost accounting system. According to the authors, based on the perception of the managerial section of any commercial enterprise, the costing management systems are incorporated. In their paper, the authors look into the factors which primarily determine the choice of the costing systems by the managers. Factors affecting the choice of the managers: The assertions made above, are also supported by the works of Luther Sartawi, (2011), who in turn zero down to several key factor influencing the managers choice of the costing system for their commercial enterprises. According to the authors, the primary factors influencing the choice are the perception of the managers regarding which arenas in the commercial activities are more crucial, what information are absolutely necessary for taking efficient and prospective business decisions, whom the business caters to and who are the primary stakeholders of the business operations. Based on these primary factors and also based on the perception of the managers regarding the nature of operation of their concerned commercial enterprise, the managers often choose one particular costing system which they find inclusive as well as comprehensible and efficient (Ismail King, 2014). However, depending upon the situation, the requirements of information among the different stakeholders and perso nal perceptions, the managers may often choose to use more than one costing system for efficient cost management and information dissipation in the commercial enterprise. Activity Based Costing System: In the context of the above discussion, the following section reviews the implications of the significant costing systems, which came into existence to fulfill the gaps in the traditional costing systems and which were a byproduct of the needs and perceptions of the managers of different commercial enterprise across the world. One such unique cost accounting system can be named as the activity based costing system. As can be seen from the research paper of Chea, (2011), the traditional costing systems, which were used and were to some extent also applicable in the previous business scenarios, started showing several severe flaws with time, especially due to the increase in the complexity, interconnectivity and global exposure of the commercial activities. The overtly simplified method, as suggested by the author, created distortions regarding the modern manufacturing costs and especially in case of services. This gave rise to a need among the managers, of a wholesome and more appropriate costing mechanism, which would not only be an efficient as well as easy way of accounting for costs, but will also incorporate accurately the different costs of production which the traditional methods could not undertake. Pierce Brown, (2006), while comparing the traditional and the activity based costing systems, from the perspective of a manager, looks into the benefits of implementing such costing systems, as perceived by the managers in general. According to the authors, this type of cost accounting empowers the managers to see the costing as well as the overall purview of the business from many different perspectives. In this cost accounting framework, the costing can be seen with respect to individual or group of products, individual customer or clientele as a whole and also with respect to the channel of distribution. As is argue in the paper, seen from any perspective, the method enables the managers to get a close view of the financial and costing situations of the enterprise (Rajabi Dabiri, 2012). Therefore, as this paper asserts, the ability of the managers to compare the profits on the basis of customers, products and regions, with the help of the activity based costing mechanism has mad e this costing system one of the recent favorites of the manager across the globe. Limitations of the Activity Based Costing Procedure: Though this costing system has gained immense popularity among the contemporary business participants, not all the managers are in favor of this particular method of costing management. As has been put forward by Fennema, Rich Krumwiede,(2005), this method of costing, assigning individual costs to each and every business activities of the commercial enterprise, becomes highly related to the evaluation and the compensations of the managers of the concerned commercial enterprises. There is another severe problem with this costing system. Due to the nature of this kind of costing system, it tends to assign costs in different proportions to the different sectors of the same business, unlike that of the traditional costing systems, depending upon their profitability and efficiency. As a result, it creates distortions in assessing, as some parts of the concerned enterprise appear to be more profitable than the other apparently. These distortions often lead to wrong interpretations of the information, by the managers, thereby leading them to take non-efficient and less foresighted decisions regarding the future path of the business operations. This in its turn may have negative implications on the prospects of the concerned enterprise (Schulze, Seuring Ewering, 2012). Tackling the problem: As can be seen from the reviews of the relevant literatures available in the aspect of the managers behavior in the choice of the appropriate costing system, the primary problem regarding this issue is the varied nature of the perceptions of the managers, regarding the need and the method of operations of the enterprise. Managers, being human beings, differ in their opinions hugely as each of them has a unique way of thinking and perceiving. This in its turn, induces them to choose the costing mechanism, which they think are fit for the organization (Zimmerman Yahya-Zadeh, 2011). The costing mechanisms, in their turn are varied in nature, some emphasizing on the job sector (job accounting), where the different employees and their nature of work and wages are taken into consideration, while some opt for process cost accounting, where the cost information are collected and interpreted according to the steps in the production process (Vanderbeck, 2012). Some managers are in favor of the traditional costing systems, which provide an easy way of cost accounting, by taking the average overhead costing method, while many more resort to activity based costing systems, which incorporate the assigned cost to every business activities in the commercial enterprise. Many a times the managers also resort to more than one costing system for the same business activity at the same time, feeling the need to cater to different stakeholders as per their requirements. Thus, the primary problem, which arises out of this, is the problem of variability and distortions in the cost accounting, which gives rise to confusions regarding which method to choose and what decisions to take to improve the prospects of the concerned enterprises. To deal with this situation, it is of immense importance to construct one robust costing mechanism, which will take into account more or less all the perspectives and aspects of the business activities of the commercial organizations and cater to the requirements of all the stakeholder simultaneously. The factors base on which the behavior of the managers regarding the choice of costing systems should also be taken into account and studies in details, in order to design such a costing mechanism, which is all inclusive, easily comprehendible, robust and timely (Bebbington, Unerman O'Dwyer, 2014). Conclusion: It can be concluded from the above discussion, that with the changes in the dynamics of the global business scenario, the business activities are also changing fast and to keep up with the pace of the highly competitive global business environment, it is of utmost importance on part of the commercial enterprises to choose an appropriate costing system. The choice of such systems are in turn dependant to a considerable extent on the behavior and the perception of the managers as much of the decision makings, regarding the productive and the overall business activities are done by them. Therefore, it is of immense importance to take into account the factors, which determine these behaviors, and to design an inclusive costing mechanism on the basis of those findings. References Bebbington, J., Unerman, J., O'Dwyer, B. (Eds.). (2014).Sustainability accounting and accountability. Routledge. Bonin, H. (2013).Generational accounting: theory and application. Springer Science Business Media. Bumey, L. L., Henle, C. A., Widener, S. K. (2009). A path model examining the relations among strategic performance measurement system characteristics, organizational justice, and extra- and in-role performance. Accounting, Organizations and Society, 34, 305-321. Chea, A. (2011). 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