Essay on Accounting

1. Based on the above article and your prior readings, do you agree with the notion of value costing for the 21st Century organizations. Why or why not?
The role of accounting in a modern enterprise has significantly changed: while in the 19th and 20th centuries principles and techniques of accounting were used to develop assistive materials for top management and were used to evaluate the performance and financial position of the company post factum, current intensification of technologies, competition and consolidation of all related business operations has turned accounting into a powerful strategic instrument. Currently accounting should be integrated into the processes of strategic decision-making in order to maintain timely and effective decisions, to forecast financial activities of the company and to maximize creation of value in the operating process.

The role of cost accounting in managerial/strategic accounting can hardly be overestimated: it is used to plan budget, analyze effectiveness and performance, determine profitability, perform variance analysis etc. However, in the 21st century due to increased competition, shorter delivery times and focus on technologies the goal of management accounting has shifted from maintaining the company’s operations to creating value. Traditional costing systems are centered around short-term evaluations and are not designed to take into account “intangible” benefits, such as human capital, technology leadership and market reputation (Gupta & Gunasekaran, 2005). A system with a wider approach is currently needed, such as value costing.

Value-based approach to costing is totally different from other costing systems since it focuses on the life cycle of the product and balanced market value to determine product cost. This approach requires to take into account not only direct and indirect costs of manufacturing the product or providing the service, but also the situation at the market, type of product or service (commodity item, luxury item, etc.), existence of competitive advantages, pricing of the competitors, presence of substitutes etc (Innes & Mitchell, 2003). As a result, using value-based costing allows the company to evaluate the effectiveness and market success of the product at the development stage. At the same time, older costing methods such as direct and variable costing, and even ABC-costing might lead to the situation when the cost of the product is higher than factual price, or the expected volumes of production do not sell at expected rates. The post factum essence of the majority of costing methods makes them questionable in the 21st century, when cost accounting is used for strategic decision-making instead of pure accounting purposes. At the same time, it is necessary to admit that value-based costing requires significant market research, studies of customer opinion and market demand (Jones & Thompson, 2000), and thorough understanding of all other factors affecting the product. If the industry is relatively stable and innovations are uncommon, or the manufacturing process is well-optimized among the major competitors, it is quite possible to apply such techniques as activity costing and JIT costing, which might also give an accurate picture of product/service costs in this case. However, for technology intensive and actively growing industries such costing methods might lead to strategic errors, and should be replaced by value costing.