Page 151 - DCOM206_COST_ACCOUNTING_II

Cost Accounting – II

Notes The view that the ‘sustainable competitive advantage’ is a mirage is true for most companies.
In past companies that could build competitive advantage could maintain that for a long
period. But in the fast changing business environment, it is difficult to maintain the same
for long. There are companies that continue to earn their return higher than the average
return primarily because they manage their intangible assets (not in accounting sense)
and product and process innovation well. Although experts may differ, but Apple- Samsung
rivalry shows that even a very strong company can face competition from a once unknown
competitor. In the backdrop of this rivalry between Apple and Samsung, the survival and
growth of other players depend largely on their ability to manage cost and innovation.
Indian automobile industry presents another example how a leader can lose competitive
advantage to other players.
In the above context it is imperative that every company should have an effective and
efficient cost accounting system, which provides reliable information on operating costs
and product cost and also provides support in strategic decision-making. Sophistication of
the costing system depends on the complexity of the product, process and the business
model.
Therefore, the board of directors should pay attention to the efficiency and effectiveness of
the cost accounting system.
The government has ordered mandatory maintenance of cost accounting records by almost
all companies that cross the threshold of specified turnover or net worth.

Most companies whose turnover exceeds ` 100 crores or whose securities are listed in a
stock exchange are required to get cost record audited by a practicing cost accountant.
For long the boards paid attention to accounting ratios and did not enquire into the
adequacy and effectiveness of the cost accounting system. However, after the government
initiative, some boards have started looking into the cost audit report. But many do not
pay the deserved attention to cost audit report and view it as compliance of another
unnecessary law framed by the government. It is true that financial statements capture the
overall performance of a company. Therefore, if a company is able to manage cost
effectively, the financial statements and accounting ratios will capture it. But financial
statements do not tell the whole story of cost management.
For example, the financial statements and related audit report fails to mention whether
the company has optimised the resource utilisation. Similarly the financial audit report
does not give the assurance that the product and customer profitability presented before
the board is correct. This is so because determination of product cost for inventory valuation
under financial accounting rules is guided by the principle of accounting prudence as
understood by financial accountants.
The principles applied to determine the product cost might deviate from cost accounting
principles. Moreover, audit of the market/customer profitability estimated by the cost
accounting system is outside the scope of financial audit. Therefore, financial audit is not
a substitute for the cost audit.

When I interact with cost auditors, I get a gloomy picture of the adequacy of the cost
accounting systems prevailing in different companies. This is not surprising because the
average maturity level in the use of cost and management accounting principles, methods
and tools in India is low. It is the responsibility of the board to ensure that the company
adopts best cost and management accounting practices. This will be a move towards
optimal utilisation of resources. It will also help the company to get appropriate cost and
revenue information necessary to formulate and implement strategies.
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