Cost And Management Accounting: Business Planning & Process Essay

Question:

Describe about the Cost and Management Accounting for Business Planning & Process.

Answer:

1. Cost and management accounting

Introduction

Cost and management accounting refers to the budgeting process of a business. It consists of planning about potential costs that will be occurred in future and applying best efforts to control them so as to gain efficiency. A cost accountant needs to predict expenditure of any future business project and identify the areas where it can be reduced and an efficient budget can be formed. The scope of cost accounting varies from a small business project to the overall business model. Before a project is started, a cost accountant is required to jot down all the expenses and during the project, expenditures are adhered to this plan so that the project may not get over budget. It also helps in management. After the project is completed, actual and budgeted costs are compared to identify the deviations and take corrective actions in future.

Cost accounting in education industry

In an education industry, cost and management accounting holds great significance since long- term expenditures comprise a major part of their costs. It is evident that long- term expenditures are the most critical ones because they are irreversible and contains huge penalty if prove to be wrong. Hence, a university must be very keen in accounting the potential costs that it will incur in coming future to deliver a particular education program to a single student. All the direct and indirect costs must be properly analysed to form a cost budget. A hypothetical situation is illustrated below (Horngren, 2009).

Calculation of the cost per student of delivering a particular degree program from a university’s perspective

Let’s take a hypothetical situation in which a university has assigned a task to its cost accountant to assess how much will they cost in providing a post graduation degree of management field to a single student. It is also advised to consider all direct and indirect overheads. Expenses should also be classified as educational and non- educational. Besides that, university has the capacity of 800 students in masters of business administration. It has also been given that this university gets a fund for $200,000 every year by the state government to conduct research and development activities intended towards finding better and innovative ways to impart education in the country.

Here is the list of different types of expenditures that are reported by the cost accountant that will be incurred next year (Greene, 2000).

Educational and non- educational expenses: this category comprises of all the expenses that are incurred by the university on imparting education directly and indirectly. Universities are not only providing education, but also involve in other areas like R&D, placement consultation and social welfare practices. All of these are listed under the head of non- educational expenses. But in educational expenses, we only include expenses like cost of infrastructure, furniture, basic amenities, salaries to teaching faculties, educational equipments, etc. The table below shows the description of these expenses.

Direct and indirect costs: educational and non- educational expenses are further classified into direct and indirect expenses (Goossens, Rutten-van M?lken, Vlaeyen, & van der Linden, 2000).

Educational expenses

Amount (in $)

Indirect costs

Cost of infrastructure (classrooms, labs, canteen, other amenities in the building)

100,000,000 (for next 20 years)

Cost of furniture

800,000 (for 5 years)

Cost of fixtures

200,000 (for five years)

Extracurricular instruments

100,000 (for one year)

Water treatment plan

700,000 (for two years)

Electricity expenses

1,500,000 (for one year)

Total

1,003,300,000

Direct costs

Salary to faculties

2,500,000 (for one year)

Laboratory equipments

500,000 (for one year)

Expenses on Cultural and curricular activities

800,000 (for one year)

Cost of stationary

400,000 (for one year)

Total

4,200,000

Non- educational expenses

Amount (in $)

Indirect costs

Cost of infrastructure (administration offices)

1,000,000 (for 20 years)

Salary to management staff

1,500,000 (for one year)

Research and development activities

200,000 (funded by government)

Public welfare activities

500,000 (for one year)

Placement consultation services

500,000 (for one year)

Other miscellaneous overheads

100,000 (for one year)

Total

3,800,000

Grand total

1,011,300,000

This total cost will be incurred on 800 students over a period of one year. However, some items are very long- term expenditures. Those should spread evenly throughout their life and the rest amount should be carried forward to next year.

The cost of educational infrastructure is $100,000,000 for 20 years. For one year, it will be accounted as $100,000,000/ 20 which equal $5,000,000. The cost of furniture is $800,000 for 5 years. For one year, it accounts for $160,000. Cost of fixtures is $200,000 for 5 years. Hence, it will amount to $40,000 for this year. Water treatment plan’s cost for this year will be $350,000. Cost of administration infrastructure will be included up to $50,000 this year.

So, total costs incurred this year would be $14,000,000 approximately. This will be divided by the total capacity of the university for this particular course. Hence, the cost of imparting education per student will be $14,000,000/ 800 which is equal to $17,500+ taxes only. However, the fees charged are quite high that constitutes the profits of the institution (Karmel, 2003).

Challenges faced in such calculations

Accounting has undergone many changes and up gradation in past decades. It not only includes, recording and interpreting transactions, but also helps in planning and controlling aspects of management. That is why organizations are known to have a hybrid accounting system for their operations. This will help them in getting an overall benefit of this function, but has also posed many challenges to accountant, especially in cost accounting calculations. Few of them are listed below.

The major challenge faced by cost accountants is that they have to make plans for future. They do not have time to react to environmental changes, rather they have to behave pro actively to get first mover advantage and competitive edge. This calls for uncertainty and huge risks are involved (Bindl & Parker, 2010).

The role of accountants has changed from mere book- keepers to planners. They have to make cost and expenditure plans for the organization, which itself is a challenging task. After all, recording past transactions is quite simple than forecasting about future operations (Briers & Chua, 2001).

Environmental changes pose another challenge for accountants. Suppose a cost accountant has prepared an effective plan but the environment has such a drastic change that even derivative plans will not work, then the entire planning goes in vain (Gray, Owen, & Adams, 1996).

Organizational change or structural amendments render the plans formulated ineffective. Adhering to such conditions is again a big challenge for accountants (Ezzamel, 1994).

Reliability of such calculations

There are two phases to be understood in this scenario. First of all, the authenticity of the budget is analysed and checked out that whether the basis used to decide various cost factors and their approximate value is reliable or not. For example, the facets like government funding, corporate social responsibility, moral values have been indulged in the decision- making process or not. These factors will have a significant impact on the university’s cost structure and their reliability based on ethics and societal obligations. Besides that, it will also have a significant impact on the fees structure faced by the students. A profit margin over and above the total costs of a university will be declared as the prescribed amount of fees that must be charged from students.

In the case study illustrated above, it is clear that the university has taken government funding into account and R&D costs are not added to the total costs incurred by the organization. This shows a positive factor in the cost accounting of the institution. However, they have included the cost of public welfare in the total costs. An organization is expected to incur the expenses on corporate social responsibility out of its profits. It is not desirable that these costs are charged by the students. Hence, this is against the ethical grounds. This reduces the cost accounting reliability to be ethically correct (Onyebuchi, 2011).

Besides that, the other phase of this cost and management accounting poses a question as to how much accurate these expenses are. External parties will never know if these expenses are over- estimated in the budget to manipulate profits’ figures and facts. This completely depends on the morality and ethical quotient of the institution’s management and the cost accountant (Carroll, Linsmeier, & Petroni, 2003).

Topic 2

This essay has talked about corporate social responsibilities and their influence on both company and the society. Different categories of CSR activities have been discussed to know the forms of CSR. Further drivers that push businesses towards CSR activities have been analyzed and finally CSR activities of various big companies have been discussed to understand the relationship between the CSR and profit maximization.

Corporate Social Responsibility

Along with public sector private sector also consider societal development as their social responsibility. Private firms consider social development as one of the most essential principles of business development. The principle of corporate social responsibility is a way through which private firms contribute in societal development. Further corporate social responsibility is a way to balance the environmental, social and economic responsibilities in their operations to address the expectations of shareholders and other stakeholders. Corporate social responsibility is integrated in the operations of the corporation, their culture, values, strategy, decision making and reporting mechanisms. There are a few categories of CSR that many of the business firms are practicing (IISD, 2016).

Environmental Efforts: One of the primary focuses of the firms through CSR activities is environment. Every business regardless of its size has large carbon footprints. Organizations take steps to reduce these carbon footprints. Removal of carbon footprints is considered beneficial for the corporation and the society as a whole. Apart from this some businesses encourage the diffusion and development of environmental friendly technologies.

Ethical Labor Practices: Businesses prepare ethical code of conduct for fair treatment with the employees. This is also the part of corporate responsibility. Ethical labor practices are especially significant for the people who are working internationally. Effective abolition of child practices and elimination of all forms of compulsory and forced labor also comes under corporate responsibility of the companies.

Philanthropy: Businesses donate to nationals and local charities as a practice of corporate responsibility. Businesses conduct various programs to help the local people and special communities.

Volunteering: Some businesses attend social welfare event without any external force and this shows their sincerity towards the welfare of the society. Businesses do good deeds without expecting anything in return and show their concern for specific issues like education, employment, economic development, child labor, environmental etc. (Caramela, 2016).

Drivers that pushes businesses towards CSR

The shrinking role of government: In the past, governments had resources to deliver environmental and societal objectives but now the government resources are shrinking day by day which have forced the businesses to take initiatives voluntary.

Increased customer interest: It is evident that the ethical code of companies influences the purchasing decision of customers. A recent survey conducted by Environics International reported that out of five customers more than one customer rated the companies on the basis of their perceived corporate social responsibilities. This shows the concern of people towards society and the influence of CSR activities on their purchasing decision (Back, 2011).

Growing investor pressure: Initially investors used to evaluate the company’s performance and on the basis of future growth they took their decision of investment but now investor’s way of analyzing company’s performance has been changed. Now investors include ethical concerns while evaluating companies for further investment. Australian investors are increasingly supporting activist campaigns on human rights and climate change issues. In some cases investors divested companies if they found the assessment of human rights and climate change on risk (Magna International Inc, 2015).

Suppliers: Suppliers are the stakeholders of a firm and now stakeholders are increasingly taking interest in business affairs. Supply chain CSR issues include prompt payment, ethical sourcing, human rights of outsourced workers, use of migrant workers, treatment of animals, doing business with oppressive regimes and environmental impact in the supply chain (Whitman, 2015).

CSR Policies and Profit maximization

After the publication of the Milton Friedman’s book: “Capitalism and Freedom”, there has been a constant debate on relationship between corporate social responsibility and profit maximization. According to Milton every corporate social responsibility is an investment wherein businesses bought assets and items with a hope to generate profit in future. On the other hand, it is argued that social responsibility programs are not meant for making profit in future. For example, software producers providing free software to the universities and drug development corporates donate free drugs to the government and other NGOs for health programs. One of the reasons behind contributing for social concerns is related to the vision and mission statement of the companies. For example Pfizer is an American global pharmaceutical corporation which is committed to health care and therefore company offers drugs for free (Fung, 2015).

Despite of the fact that companies offer resources and help to a different segment of society still it does not mean that these firms are just helping the society and behind this there is no personal motive of them. Every corporate house has some personal motive behind any social responsibility. There are three reasons for considering this fact. Whenever a company performs any social responsibility it attracts the media coverage towards the company without any investment in media coverage. For example, if any company wishes to advertise their products through WSJ global edition then it costs nearly $400000 for a full page color advertisement. On the other hand, whenever a firm donates for CSR the social media automatically advertise the company’s name. In other words it is also a direct cost saving or indirect profit increasing act (Robins, 2016).

Another benefit of performing CSR activity is improved social status of corporate within the local areas. By doing CSR activities firms automatically earns social licenses for their business operations. The best example of this approach is the coal mining firms. Coal mining firms cause serious pollution in the local environment and also deter the overall development of the surrounding area. BHP billion is the world’s third largest global mining, oil and gas company. The company is actively involved in various corporate social responsibilities. BHP has created various foundations like The Minera Escondida Foundation in Chile to improve the quality life of local communities, The Montel?bano Educational Foundation in Colombia to provide quality education to Cerro Matoso employees and their families etc. BHP SEWA society is focusing development in human and social capabilities of India. Through good social responsibility programs and developing good relationship with the local communities, firms try to get hidden approval for exploration rights (AMMA, 2015).

Some companies are making corporate social responsibility a core of their operations such as Starbucks Company has created its C.A.F.E. practices guidelines which ensures that company process coffee by evaluating social, economic and environmental aspects of coffee production. Another notable example of effective CSR are Tom’s Shoes which donates one pair of shoes to needy children on every purchase of a pair of shoes. This shows that companies are associating CSR activities with their core values and operations. Through this approach of association, organizations are achieving two objectives one is fulfilling their responsibility towards society and another is establishing a strong brand image among the customers (ACCSR, 2016; Caneva, 2014).

Conclusion

Nonetheless the debate still continues on the role of CSR whether it is a pure non-profit act or it is an investment to generate profit in future. Some points that came into light through this analysis are that most of the big corporate houses contribute in CSR activities either in a wealth protecting or wealth enhancing way. The other fact is that investment in CSR activities always proved a beneficial step for every organization. Most of the executives believe that CSR activities help in improving the image of the organization which ultimately affects the growth of the business. Almost every company is engaged in the CSR activities that shows how important CSR activities are from the business point of view.

References

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