CURRENT COST

ACCOUNTING METHODS
CHALLENGE FOR
ACCOUNTING PROFESSION

Lívia Rác, dr Györgyi Petkovics

Faculty of Economics, Subotica, Serbia 2008.10.02.
 Overview

• The place of cost accounting

• Development of cost accounting
• Importance of cost calculation
• Modern costing systems
• Traditional vs. modern costing
• Conclusion
 Overview

• The place of cost accounting

• Development of cost accounting
• Importance of cost calculation
• Modern costing systems
• Traditional vs. modern costing
• Conclusion
 The place of cost accounting

Accounting

Financial acc. Managerial acc.

bank Cost accounting
 Overview

• The place of cost accounting

• Development of cost accounting
• Importance of cost calculation
• Modern costing systems
• Traditional vs. modern costing
• Conclusion
 Development of cost accounting

Traditional systems Modern systems

- Target costing
- Department c.
- Actual costing
- Activity-based c.
- Variable c.
- Normal costing
- BSC
- Standard costing
 Overview

• The place of cost accounting

• Development of cost accounting
• Importance of cost calculation
• Modern costing systems
• Traditional vs. modern costing
• Conclusion
 Importance of cost calculation

How to assign indirect costs (tip for the waiter) to products?

 Overview

• The place of cost accounting

• Development of cost accounting
• Importance of cost calculation
• Modern costing systems
• Traditional vs. modern costing
• Conclusion
Modern costing systems

- Target costing
- Department c.
- Activity-based c.
- Variable c.
- BSC
 Modern costing systems

Target costing – focuses on target cost per unit, which is the

estimated unit cost of a product that, when sold at the target
price, enables organization to earn the target profit per unit.
- locked in = designed in costs
- cost incurrence

Department costing – instead of a single allocation base, uses

separate indirect-cost rates for each department. It
supposes that each department has different allocation base.
 Modern costing systems

Activity-based costing – a technique for calculating object

costs, in the way that overhead, selling, general and
administrative costs assigned to an object reflect the overhead
services actually consumed by that object.

resources General ledger cost data

activity activity cost pools

cause-effect relation
cost object cost object
(product, customer...) (product, customer...)
 Modern costing systems

Activity-based costing
- every company has to determine its true economic costs
with understanding the costs relation to its products/services

- ABC is a simple concept that can be, and has to be

adopted in a wide variety of ways

Balanced Scorecard concept – translates a company’s strategy

into a comprehensive set of performance measures.

Internal bus. Learning

Financial Customer process and growth
 Overview

• The place of cost accounting

• Development of cost accounting
• Importance of cost calculation
• Modern costing systems
• Traditional vs. modern costing
• Conclusion
 Traditional vs. modern costing
Traditional costing
Only manufacturing costs are
assigned to products.
Selling, general and
administrative expenses are
period expenses.
Activity-based costing
Manufacturing as well as non-
manufacturing costs can be
assigned to products (some
manufacturing costs may be
excluded from product costs).
Selling, general and
administrative expenses can be
assigned to products if there is a
cost-effect relation between them.
 Traditional vs. modern costing

Traditional costing Activity-based costing

A single overhead rate is used for A number of overhead cost pools
the entire factory: direct labor- or exist, with different allocation
machine-hours. bases.

Costs of unused capacity are Costs of idle capacity are not

assigned to products too. assigned to products (only the
costs of capacity they use).
 Overview

• The place of cost accounting

• Development of cost accounting
• Importance of cost calculation
• Modern costing systems
• Traditional vs. modern costing
• Conclusion
 Conclusion

- New expressions: idle capacity, cost pools, activity-based concept,

sunk cost, value- and non-value added costs, target pricing, relevant
costs, etc.

- most cost systems are based on financial accounting’s rules

because of:
- behavior problem
- financial problem
- technical problem

- there is a need for maintaining two cost systems parallel

 Conclusion

- managers need a road map

- with modern costing methods company has to make a self-portrait

- ABC is a concept to adopt, not the system to install

- the accounting profession continuously has to improve costing

methods, to provide a true picture about the company’s cost
structure
“Far better an approximate answer to the right
question, than the exact answer to the wrong question.”

(John Tukey, Princeton University.)

liviar@eccf.su.ac.yu