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Cost Accounting In The Age Of Pricing
As alternative, modern costing techniques such as Activity Based Costing (ABC) provides a definite solution to this problem of inaccurate cost management.
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We are living in hyper-competitive times. We are bombarded with discount offers from every direction. The sources of competitive advantage for firms are changing. The buyer behavior is undergoing an unprecedented change. Companies thrive on price sensitive tactics and consumers keep raising the bar of expectation in terms of value for their money. In other words we are experiencing the new age of pricing. Today if customer is the king, pricing is the kingmaker. So, decision makers might ponder upon a fundamental question which is "Whether Cost Accounting Matters in the Age of Pricing?" If competition decides the price, do we need to worry about our actual cost at all?
Cost Accounting or Costing is a time tested science of recording and analyzing cost information. In India the profession of cost accounting dates back to year 1959. With rising need for accurate cost information Government of India established a statutory body called The Institute of Cost and Works Accountants of India. The traditional approach of managing cost by measuring it proved useful for many years. It mostly remained restricted to manufacturing setups. The need for a robust cost transformation model was neither felt nor imagined for decades. But with modern manufacturing systems, growth of service sector and non-linear market conditions, merely accumulating cost data does not add any value beyond procedural compliance.
Business Excellence refers to practices adopted by organizations in order to achieve outstanding results. One of the pre-requisites for achieving business excellence is having a robust system of managerial control for the organization. Management Accountants have made significant contribution to the use of financial and non-financial controls in organizations. Cost management practices such as Activity Based Management, Target Costing, Life Cycle Costing and Throughput Costing generate critical data for decision making on strategic issues. But without a proper framework of controls, organizations fail to measure results and keep track of performance.
Therefore management accountants or CMAs have a huge role to play in making strategy work. They have access to information which has long-term impact on success or failure of an organization's goals. Management control systems are designed to measure and moderate performance resulting from managerial decisions. One of the essential support system for managerial control is the costing system in the organization.
Strategy formulation looks at creating and sustaining competitive advantage. There are several approaches that companies adopt to achieve their strategic objectives. Cost management is an integral part of all these approaches. Whether a firm competes on differentiation or cost leadership, cost managers and cost controllers provide essential inputs to CEOs and CFOs in their decision making process. Despite of advancement in information technology and decision support systems, Indian firms predominantly use traditional costing systems like Absorption Costing and Standard Costing for performance management. This has resulted into inaccurate reporting of costs to management and thereby has resulted in lacunas in managerial control especially with respect to financial aspects. As alternative, modern costing techniques such as Activity Based Costing (ABC) provides a definite solution to this problem of inaccurate cost management. Cost advantage can be traced to products and services only when companies have enterprise resource planning approach towards costing.
In the age of Pricing we need reverse engineering to work-out the strategic advantage of cost. Costing of good old days will not take companies forward. Strategic Cost Management i.e. seamless integration of costing and strategy has to get embedded in your Art of War. Those leaders who are responsible for handling controlling function in modern times have great power and great responsibility of making this happen.
Disclaimer: The views expressed in the article above are those of the authors' and do not necessarily represent or reflect the views of this publishing house. Unless otherwise noted, the author is writing in his/her personal capacity. They are not intended and should not be thought to represent official ideas, attitudes, or policies of any agency or institution.