The Emerging Need for Managerial Cost Accounting

Cost determination is a fundamental requirement for a broad range of measurement and decision making processes. The elemental nature of however, has created considerable confusion as to the purpose, and more importantly, the direction of cost accounting. Accountants who have spent their entire careers in one area of cost accounting may not recognize the differences inherent in other forms of cost accounting. For many accountants, cost accounting is an island in the world of financial accounting for external financial statements. To some accountants, cost accounting is a world of its own with rigorously defined standards of reporting for determining very specific types of cost. Yet, to other accountants, cost accounting is a universe of customized, managerially relevant, financial measurements. The purpose of this paper is two-fold. First, it will suggest a conceptual framework of labels and definitions for these vastly different kinds of cost accounting systems to, hopefully, reduce the confusion as to the purpose of cost accounting. These labels are financial cost accounting, regulatory cost accounting, and managerial cost accounting, respectively. Second, the paper will differentiate the role of managerial cost accounting and review recent federal evidence indicating the importance of the emerging need for better management of cost, and by implication, for managerial cost accounting. Financial Cast Accounting Supplies Cost Information for External Reporting The Financial Accounting Standards Board, the Governmental Accounting Standards Board, and the Federal Accounting Standards Advisory Board establish generally accepted accounting principles for the external reports required of corporations, governments, and non-profit organizations. A portion of these standards deals with the measurement specification of costs, expenses, and expenditures. It is suggested here that cost accounting for the purpose of supporting external reporting requirements be labeled financial cost accounting. For example, financial cost accounting standards define how a corporation will expense depreciation cost over some theoretically determined useful life of a capital asset. Financial accounting standards for a government entity might require purchase cost of a similar capital asset to be recorded as an expenditure during the period of purchase.(1) Regulatory Cost Accounting States How Cost Will Be Reported to Some Outside Authority While financial cost accounting supplies cost information for a broad range of users, it is suggested here that cost information reported to an outside authority be labeled as regulatory cost accounting. While similar in that both report cost information as specified by an external user, regulatory cost accounting differs since the information is used by an outside authority in some way that directly impacts the reporting organization. The Cost Accounting Standards Board, for example, has developed detailed financial measurement standards for measuring and controlling defense contractors' costs. Tax Code specifies how organizations and individuals must account for their costs. Some costs are deductible and reported while others are not. This could be considered simply another form of regulatory cost accounting. It should be noted, however, that from the contractor and taxpayer perspective, regulatory cost accounting is simply another type of external reporting. Outsiders specify the measurement process, and the reporter-accountant must comply with that specification. Managerial Cost Accounting Serves the Cost Information Needs of Managers It is suggested here that managerial cost accounting systems are those specified by insiders for insider use. Similarity to financial cost accounting or regulatory cost accounting specification is only coincidental or, perhaps, convenient. Managerial cost accounting embraces many different approaches to the cost measurement problem: activity based costing, job costing, and process costing, for example. …