Advantages Of Cost Accounting

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2.0 Introduction Accounting techniques provide useful tools for assessing the performance and ascertaining the profitability of business operations. ‘Profit’ is one of the simplistic measures of performance. Profit is the difference between revenues and costs. Revenues usually come from sales and other income generating activities of the business establishment. Cost on the hand includes all expenditures incurred in the course of running the business. These cost could be direct or indirect in nature depending on their traceability to a cost or cost unit (direct cost, indirect cost, cost center and cost unit are defined later). In traditional cost accounting, direct costs are allocated to cost centers or cost the cost units where they can be…show more content…
These broad categories include: (a) Materials, Labor (b) and (c) Overheads. According to them, this traditional system “fails to distinguish which products or customers generate the respective costs” (Goldsby and Closs, 2000). Logistics cost usually suffer from the consequences of such classification system. Manunen (2000) identified logistics cost to include “all the costs in a supply chain that are caused by the flow of material, including the cost of information flow associated with the material flow”. According to him, the logistics cost includes the following “transportation, forwarding, customs operations, warehousing (receiving, receiving inspection, shelving, storage, holding stock, picking, packaging and shipping), purchasing, ordering, payment transactions, materials management in production, sales (including receiving orders) and recycling”. As stated before, there is an improper classification of these in the traditional cost accounting system. Given the assertion of Goldsby and Closs (2000), some of these logistics costs are classified as materials whiles others are classified as overheads. For example it is typical in traditional coast accounting system for transportation of materials to be considered and treated as part of materials cost. In other situations logistics costs are included in the expenses categories such as general expenses, selling expenses or even administrative expenses (Stapleton, Pati, Beach, & Julmanichoti, 2004). The same is the view of Bernard, LaLonde, Terrance L. Pohlen() when they opined that “traditional cost accounting buries many “tailored” logistics costs in indirect or “overhead” accounts such as sales, general, and administration (SG&A). These costs are allocated based on sales or volume shipped rather than how they are actually consumed”. Usually, indirect logistics cost that included in large cost

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